North Texas Municipal Water District

An organization should have a system of internal controls, which are sufficiently designed to allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements of the financial statements on a timely basis. An effective system of internal controls also needs to operate as designed. Formal written policies and procedures are an integral part of a system of internal controls. Such policies and procedures are established to ensure integrity over financial reporting and to safeguard assets. Significant audit adjustments were required to correct errors and improper presentation of capital asset financial information. These adjustments primarily related to agreements with third parties who also had responsibilities for the project. 1. When the District constructs assets, often they enter into interlocal agreements with other local governments whereby the other local government contributes an agreed upon amount to participate in the funding the project. In many cases the assets are owned by the District and the District has the responsibility to maintain and operate. When funds are received from participating entities, management erroneously recorded a decrease to the CIP cost basis of the asset rather than recognize the funds as contribution or nonoperating revenue. 2. The District received a reimbursement of a portion of funds the District had previously, in a prior year, contributed to a local entity in relation to a project. The previous contribution had been properly recorded as nonoperating expense. However, management incorrectly recorded the refunded amount as decrease to a CIP asset instead of recording it as an increase to nonoperating revenue. 3. A significant construction project which had primarily been placed in service, was still being carried in CIP. Upon inquiry and investigation, due to a number of unique and complex requirements in the agreement with another governmental entity, it was found to be correctly still included in CIP rather than moved to a capital asset category at this time. However, there was an initial lack of understanding of the contract milestones which will have significant impact on accounting treatment of the asset upon reaching the agreement milestones. 4. For large projects that have been completed, management's standard practice is to reclassify the majority of the project from CIP to the appropriate capital asset category once placed in service. A portion of the project which relates to the remaining retainage or accruals is left in CIP until it's paid, even though it's been placed in service, essentially using a cash basis versus accrual basis of accounting. There is no documented procedure around the review of this practice to ensure the portions of projects remaining in CIP and the related potential depreciation is immaterial to the period, nor to ensure a remaining project cost has not been overlooked in the capitalization process. Review of contracts and applicable entries, internal controls, policies and procedures were either not in place, not adequately documented, or not operating effectively or not followed.

he District agrees with Crowe's recommendation and the Accounting and Engineering team will work together to develop and document detailed procedures for CIP, as well as specific written procedures related to each agreement/contract. We will also hold meetings monthly to discuss project status, new projects and other items related to open projects, including any projects without recent activity and those close to completion. Additionally, the District will document specific procedures related to accounting for retainage and accruals regarding completed projects and track the financial impact. Once complete, management will conduct training to ensure the new documented procedures are shared with the Engineering and Accounting personnel involved in the CIP process.