Washington State Auditor Troy Kelley

January 22, 2013

Mayor and City Council City of Monroe Monroe, Washington

Management Letter This letter includes a summary of specific matters that we identified in planning and performing our accountability audit of the City of Monroe from January 1, 2011 through December 31, 2011. We believe our recommendations will assist you in improving the Citys internal controls in these areas. We will review the status of these matters during our next audit. We have already discussed our comments with and made suggestions for improvements to District officials and personnel. If you have any further questions, please contact me at (425) 257-2137. We would also like to take this opportunity to extend our appreciation to your staff for the cooperation and assistance given during the course of the audit. Sincerely,

Casey Dwyer, Audit Manager Attachment

Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (360) 902-0370 TDD Relay (800) 833-6388 FAX (360) 753-0646 http://www.sao.wa.gov

Management Letter City of Monroe January 1, 2011 through December 31, 2011 Financial statement preparation During our fiscal year 2010 audit of the City, we identified deficiencies in the internal controls over the preparation of the Citys financial statements. During the current audit, we noted these deficiencies continued. In 2011, accounting staff were responsible for preparing the financial statements, notes, and Schedule of Liabilities for the first time. Although the Finance Director is responsible for a final review of the financial statements, we noted this review was not effective in detecting errors in the presentation of the financial statements. As a result, the original financial statements, notes and Schedule of Long-term Liabilities the City provided for audit, contained errors or were missing information. Specifically:

The City made changes to its financial statements based on Budgeting, Accounting and Reporting System (BARS) Manual requirements to combine all previously reported managerial funds into its General Fund. During the process of combining these funds, the City did not remove transfers between funds, resulting in a $725,702 overstatement of both revenues and expenditures. In our review of bank activity compared to revenues and expenditures reported on the financial statements, we found expenditures likely were understated by $703,490. The Schedule of Long-term Liabilities did not include a title and did not report compensated absences of $1,774,430. Fund 450, Revenue Bond Reserve, activity was not combined with other water, sewer, and storm drainage financial activities for reporting purposes, as required by the BARS Manual. Revised financial statements presented for audit included a typo that resulted in a $24,975 overstatement of resources in the Parks Construction In Progress Fund. We found multiple instances in which the notes to the financial statements did not reconcile with known activity and account balances reported in the statements. Additionally, the City did not include a required note disclosure stating how it determined funds were reserved or unreserved.

We recommend the City improve internal controls over financial statement preparation to include a thorough review of the financial statements, notes and supporting schedules to ensure they are accurate, complete, and presented in accordance with the BARS Manual.

Allocation of shared costs Cities incur costs for central services, such as administration, human resources, payroll and purchasing that are shared among funds that benefit from the service provided by the general fund. Cities may adopt a fair and equitable method of distributing these shared costs among funds. However, State law prohibits resources restricted for certain uses, such as utilities, from benefitting other funds without receiving value (RCW 43.09.210). In our prior statewide cost allocation performance audit, we reviewed the Citys cost allocation plan. The City revised its 2011 cost allocation plan based on the performance audits recommendations. We reviewed the Citys cost allocation plan for 2011 and found most had been revised to incorporate best practices. However, we found: In 2011, the City charged the water, sewer, storm, and solid waste utility funds $997,446 for internal service costs from three funds (Fund 510 Information Technology, Fund 520 Equipment and Vehicle, and Fund 530 Facilities). The Citys method of allocating internal services costs was based on budgeted amounts and was not reconciled to actual costs at year-end. We estimate the utility funds were overcharged by $41,974 based on equipment, vehicle and facility actual costs. We were unable to determine the exact overcharge to utility funds for costs associated with information technology costs, because the City was unable to locate its allocation plan.

When costs charged to utility funds exceed the benefit the fund received, utility customers may pay higher utility rates than necessary. We recommend the City: Ensure shared services costs distributed to each fund represent the amount of service or benefit each fund receives. Retain documentation to support actual charges to each fund and how it calculated them. Repay the utility funds for amounts overcharged.