ST. JOSEPH COUNTY TRANSPORTATION AUTHORITYLocal Government

Material Weakness – 2024-003 - Supporting Documentation and Review and Approval for Federal Expenditures (Repeat Finding) Finding Type: Material weakness in internal controls over compliance and immaterial non-compliance. Federal Program: 20.509 Formula Grants for Rural Transits. Compliance Requirements: Allowable Activities and Allowable Costs. Questioned Costs: There were no questioned costs as a result of this finding. Criteria: Management is responsible for verifying that federal expenditures are in compliance with allowable costs and allowable activities. Condition/Finding: The Authority had instances during accounts payable, payroll, and journal entry testing where documentation of expenditures lacked evidence of review by senior management. Cause: Lack of documentation of review and approval by management of certain elements of accounts payable, payroll, and journal entries. Effect: Increased risk of errors or misstatements in financial records related to federal funds. Recommendation: The Authority should implement procedures for the independent review and approval by management over all accounts payable, payroll, and journal entries related to federal funds. View of Responsible Officials (Corrective Action): [See Corrective Action Plan]

Views of Responsible Officials and Planned Corrective Actions: [To be provided by the Transit Authority]

2020-001 - Material Audit Adjustments and Financial Statement Preparation Finding Type - Material Weakness in Internal Control Over Financial Reporting Criteria: All governmental units in Michigan are required to prepare financial statements in accordance with generally accepted accounting principles (GAAP). This is the responsibility of the management. The preparation of financial statements in accordance with GAAP requires internal controls over both: 1) recording, processing, and summarizing accounting data (i.e. maintaining internal accounting records), and 2) reporting government-wide and fund financial statements, including the related notes to the financial statements (i.e. external financial reporting). Further, the Uniform Guidance, ?200.510, requires that a recipient of federal awards subject to a single audit "prepare a schedule of expenditures of Federal awards for the period covered by the auditee's financial statements which must include the total Federal awards expended as determined in accordance with ?200.502." The Authority is required to prepare the Schedule of Expenditures of Federal Awards (the "Schedule") in accordance with these guidelines. "Condition: Management was able to provide us with an initial set of financial statements and Schedule in a timely manner. However, we identified errors, such as errors in year-end accruals. These errors in the aggregate were deemed to have a material impact on the basic financial statements and Schedule as a whole. We also assisted management with preparing the basic financial statements and the related footnotes. As is the case with many small and medium-sized governmental units, the Authority has historically relied on its independent external auditor to assist with the preparation of the financial statements, the related notes, and the management?s discussion and analysis as part of its external financial reporting process. Accordingly, the Authority?s ability to prepare financial statements in accordance with GAAP is based, in part, on its reliance on its external auditor, who cannot, by definition, be considered part of the Authority?s internal controls. Having the auditor draft the annual financial statements is allowable under current auditing standards and ethical guidelines and may be the most efficient and effective method for preparation of the Authority?s financial statements. However, when an entity (on its own) lacks the ability to produce financial statements that conform to GAAP, or when material audit adjustments are identified by the auditor, auditing standards require that such conditions be communicated in writing as material weaknesses. " Cause: This condition was caused by the Authority?s decision to outsource the preparation of its annual financial statements to the external auditor rather than incur the costs of obtaining the necessary training and expertise required for the Authority to perform this task internally because outsourcing the task is considered more cost effective. Effect: The Authority?s accounting records and Schedule were initially misstated by amounts material to the financial statements. In addition, the Authority lacks complete internal controls over the preparation all of its financial statements in accordance with GAAP and the Uniform Guidance, and, instead, relies, at least in part, on assistance from its external auditor for assistance with this task. Recommendation: We recommend that management continue to monitor the relative costs and benefits of securing the internal or other external resources necessary to develop material adjustments and prepare a draft of the Authority?s annual financial statements versus contracting with its auditor for these services. View of Responsible Officials and Planned Corrective Actions: Provided under separate cover.

2020-002 - Segregation of Incompatible Duties Finding Type - Material Weakness Over Seperation of Duties Criteria: Management is responsible for establishing and maintaining internal controls in order to safeguard the assets of the Authority. A key element of internal control is the segregation of incompatible duties within the accounting function. Condition: The Authority has accounting functions which are performed by the same individual and are not subject to a documented independent review and approval. Examples include bank account reconciliations and manual journal entries, none of which contained documented independent review during our testing. Cause: This condition is a result of the limited size of the Authority?s accounting staff. Effect: As a result of this condition, the Authority 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. 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. View of Responsible Officials and Planned Corrective Actions: Provided under separate cover.