April 13, 2010

To The Honorable Mayor and City Council

City of Vermilion
5511 Liberty Avenue
Vermilion, Ohio

INDEPENDENT AUDITOR’S MANAGEMENT LETTER

In accordance with Government Auditing Standards applicable to financial audits, we have audited the basic
financial statements of the City of Vermilion, as of and for the year ended December 31, 2008, and have
issued our report thereon dated April 13, 2010.

Government Auditing Standards also require that we describe the scope of our testing of compliance with
laws and regulations and internal control over financial reporting and report any irregularities, illegal acts,
other material noncompliance, and significant deficiencies in the internal controls. We have issued a report
dated April 13, 2010, on compliance and internal control over financial reporting required by Government
Auditing Standards as of and for the year ended December 31, 2008.

We are submitting for your consideration the following comments on the City’s compliance with applicable
laws and regulations and on its internal controls. The memorandum that accompanies this letter summarizes
our comments and suggestions regarding these matters. These comments reflect matters that, while in our
opinion do not present material instances of noncompliance or significant deficiencies, we believe represent
matters for which improvements in compliance or internal controls or operations efficiencies might be
achieved. These comments reflect our continuing desire to assist your government. The status of these
comments should be reviewed during the subsequent audit engagement. We have already discussed these
comments and suggestions with various City personnel, and we will be pleased to discuss them in further
detail at your convenience, to perform any additional study of these matters, or to assist you in implementing
the recommendations. If you have any questions or concerns regarding these comments please do not hesitate
to contact us.

This report is intended solely for the information of the members of City Council and management and is not
intended to be and should not be used by anyone other than these specified parties.
City of Vermilion
Management Letter
Page 2
OPPORTUNITIES FOR BUSINESS IMPROVEMENT

Developing Policies*

During audit procedures performed in current period and also in prior periods, it was discovered that the
City is lacking formal policies for a variety of different items that are discussed in more detail below. By
formalizing and enforcing these policies, the City will reduce the risk of intentional or unintentional misuse
of the below items. Also, the formalized policies will serve as a means of holding employees accountable
if such misuse is identified.

Credit Card Policy

Under Ohio law, any public official who either authorizes an illegal expenditure of public funds or
supervises the accounts of a public office from which such illegal expenditure is made is strictly liable for
the amount of such expenditure. [Seward v. National Surety Corp., 120 Ohio St. 47 (1929); 1980 Op. Atty
Gen. No. 80-074: Ohio Rev. Code Section 9.39; State, ex. rel. Village of Linndale v. Masten, 18 Ohio St.
3d 228 (1985)]. Public officials who have control over public funds or property are secondarily liable for
the loss incurred should such funds or property be fraudulently obtained by another, converted,
misappropriated, lost or stolen. Public officials will be liable if and to the extent that recovery or restitution
is not obtained from the persons who unlawfully obtained such funds or property, 1980 Op. Atty Gen. No.
80-074.

City Council has not adopted a credit card policy which sufficiently governs the authorization and limits
the use of City credit cards. Credit cards were held with Speedway, Tractor Supply, and Staples, which
were available to City employees to make purchases with limited supervision and oversight. As a result,
the risk of the City’s credit cards being used for personal gain is increased.

We recommend City Council adopt and implement a formal written credit card policy, as evidenced in the
minute records, which outlines the following:

• Identify authorized users

• Guidelines for allowable uses
• Specific unallowable uses
• Procedures to safeguard credit cards when not in use
• Individuals required to monitor and review credit card purchases for propriety
• Any other guidelines deemed appropriate by the legislative body

Employee Travel Policy

During our compliance testing we noted the City did not maintain a travel policy that included a reference
to frequent flyer miles. Ohio Ethics Commission Advisory Opinion No. 91-010 indicates that a state
official or employee from accepting, soliciting, or using the authority or influence of her position to secure,
for personal travel, a discounted or free “frequent flyer” airline ticket or other benefit from an airline if she
has obtained the ticket or other benefit from the purchase of airline tickets, for use in official travel, by the
department, division, agency, institution, or other entity with which she serves, or by which she is
employed or connected. This may cause the City to experience, excess costs associated with travel. We
recommend City Council update their travel policy to include additional detail regarding travel related
promotions and/or perks.

City Owned Vehicles Policy

The City does not have a formal policy addressing the usage of City owned vehicles. We recommend the
City adopt a formal policy addressing the guidelines for allowable usage and specific restrictions in regards
to personal use, if allowed, along with any other concerns of the City.
City of Vermilion
Management Letter
Page 3
OPPORTUNITIES FOR BUSINESS IMPROVEMENT (Continued)

Developing Policies* (Continued)

Personnel Policy
The City does not have a formal personnel policy and procedure manual to clarify the benefits of non-
union employees. We recommend the City adopt formal policies to help eliminate questions and confusing
areas the City has encountered regarding the various benefits of employees not covered by union
agreements.

Investment Policy
We noted the City’s investment policy does not require financial institutions to comply with ORC 135.
We recommend the City hold the financial institutions accountable for compliance with ORC 135 by
updating their investment policy to require financial institutions to comply with ORC 135

Utility Department

Sewer and Water Indirect Cost Plan*

We noted that the ordinance approving certain salaries for employees to be reimbursed from the water and
sewer funds is only done on an annual basis and there is usually not enough money in the water or sewer
fund to pay these obligations. We recommend that if the City wants to continue to bill the water and sewer
funds for other employee salaries, that they consider performing rate study to determine the appropriate
rates to charge for water and sewer and consider billing on a more frequent basis, such as monthly or
quarterly, to more accurately depict the activity in these funds on an interim basis.

Improving Water System*

It was noted that the City did not bill 49 percent of the water pumped from its water plant during 2008.
The City could benefit from a more efficient water distribution system.

We recommend seeking out an expert to perform a study to better identify problem areas within the City’s
water system. As a result, the water pumping and billing system should operate more efficiently, thus
generating more revenue and also eliminating unnecessary funds spent on wasted water.

Utility Adjustments
Reported leaks are the only utility adjustments subject to proper approval. All other utility adjustments to
customer accounts for overbilling and to certify to the County for liens are performed by utility clerks with
no formal approval by supervisory personnel.

We recommend that the City develop a signature-based approval process for all account adjustments by the
Service Director, Director of Finance or other City appointed designee. Implementation of the above may
deter the opportunity to commit fraud, prevent misappropriation of revenue and mitigate the risk of
misstatement due to error and/or fraud.

Building Department Controls

During building department receipt testing, an overpayment for a subcontractor permit was discovered on a
tested receipt. Even though the normal fee was $100, the customer was charged $125 and did not receive a
refund. According to the City’s policy, refunds are not granted unless requested; therefore, this was not
deemed improper.

We recommend the City charge the correct fees to customers’ accounts and provide refunds for any
overpayments. However, it is indicative of weakened controls over charging proper rates for services.
City of Vermilion
Management Letter
Page 4
OPPORTUNITIES FOR BUSINESS IMPROVEMENT (Continued)

General Information Technology Controls

Business Continuity Plan (BCP)

No BCP exists for the SSI financial system. The BCP with established and tested plans and procedures
will mitigate the effects of disaster on the financial operations. In addition, it will facilitate a speedy return
to working order as the anticipated time of recovery is known based upon the results of the annual BCP test
performed. We recommend the City should both establish a BCP for the SSI financial system and test it.

Logical Access
The SSI logical access controls currently in place are extremely weak. We recommend removing the role
rights of the five UserID’s that have existing unrestricted access to the finance and payroll modules. New
access groups should be developed and assigned to these UserID’s that more accurately fit their current job
roles. In addition, we recommend deleting all active UserID’s for exited employees. Improved logical
access controls within SSI reduce the risk that no person has incompatible duties that would permit the
perpetration and concealment of material errors or irregularities.

FEDERAL NONCOMPLIANCE CITATION

Filing Requirements *

Code of Federal Regulations Title 17 Section 240.15c2-12. The City is required to file annual financial
information and operating data, timely material event notices and audited financial statements or a timely
notice of failure to provide required financial information, either directly or indirectly through an indenture
trustee or a designated agent, to each nationally recognized municipal securities information repository
(NRMSIR) and to the appropriate state information depository (SID). We noted the City filed material
event notices but did not submit an annual report with each NRMSIR or SID.

OHIO REVISED CODE NONCOMPLIANCE CITATIONS

We have performed procedures to test the City’s compliance with provisions of laws and regulations as
identified in the Auditor of State’s Ohio Compliance Supplement, for the period January 1, 2008, to
December 31, 2008.

Immaterial citations noted during compliance testing are as follows:

1. Ohio Rev. Code Section 9.24(A)* states that no state agency and no political subdivision
receiving more than $50,000 in state funds in a fiscal year (per OAG 2004-014) shall award a
contract for goods, services, or construction, paid for in whole or in part with state funds, to a
person against whom a finding for recovery has been issued by the auditor of state, if the
finding for recovery is unresolved.

The City was unable to furnish documentation indicating the AOS Finding for Recovery Database was
searched prior to awarding bid contracts for state funded projects.

2. Ohio Rev. Code Section 9.38* states that “public money must be deposited with the treasurer of the
public office or to a designated depository on the business day following the day of receipt. If the
amount of daily receipts does not exceed $1,000 and the receipts can be safeguarded, public offices
may adopt a policy permitting their officials who receive this money to hold it past the next business
day, but the deposit must be made no later than three business days after receiving it. The policy must
include provisions and procedures to safeguard the money during the intervening period”.
City of Vermilion
Management Letter
Page 5
OHIO REVISED CODE NONCOMPLIANCE CITATIONS (Continued)

During testing we discovered three departments not depositing money in a timely manner. The Port
Authority maintains cash receipts in a locked safe; however, these receipts are only being deposited on
a weekly basis during weekly reconciliations, typically performed on Mondays. In regards to the
building department, we discovered nine of the ten selected receipts were deposited in two or more
business days. Similarly, three of the ten court receipts selected for testing were in excess of $1,000
and deposited in two or more business days.

3. Ohio Rev. Code Section 117.38 instructs each public office to file a financial report for each fiscal
year with the auditor of state within 150 days after the close of the fiscal year. At the time the report is
filed with the auditor of state, the chief fiscal officer shall publish notice in a newspaper of general
circulation in the political subdivision or taxing district. The notice shall state that the financial report
has been completed by the public office and is available for public inspection at the office of the chief
fiscal officer.

Any public office that does not file its financial report at the time required by this section shall pay to
the auditor of state 25 dollars for each day the report remains unfiled after the filing date; provided,
that the penalty payments shall not exceed the sum of seven hundred fifty dollars.

Upon contacting the auditor of state’s office, it was determined that the City did not file the 2007
financial statements with the auditor of state’s office, which resulted in a fine of $750. Consequently,
the City was not able to notify the public that the financial statements were available for review.

4. Ohio Rev. Code Section 1901.31(G) asserts that “on the first Monday in January of each year, the
clerk shall make a list of the titles of all cases in the court that were finally determined more than one
year past in which there remains unclaimed in the possession of the clerk any funds, or any part of a
deposit for security of costs not consumed by the costs in the case. The clerk shall give notice of the
moneys to the parties who are entitled to the moneys or to their attorneys of record. All the moneys
remaining unclaimed on the first day of April of each year shall be paid by the clerk to the city
treasurer. The treasurer shall pay any part of the moneys at any time to the person who has the right to
the moneys upon proper certification of the clerk”.

Correspondence was not sent out on the first Monday of January to those with unclaimed funds; nor
were the funds collected by April 1 distributed to the finance department’s unclaimed funds.

5. Ohio Rev. Code Section 5705.28(A) states that the taxing authority of each subdivision or other
taxing unit shall adopt a tax budget for the next succeeding fiscal year on or before the fifteenth day of
July.

The City did not adopt a Council approved tax budget during 2008 nor did they request an extension in
an attempt to be compliant.

6. Ohio Rev. Code Section 5705.34 states that each taxing authority, by ordinance or resolution, shall
authorize the necessary tax levies and certify them to the county auditor before the first day of October
in each year, or at such later date as is approved by the tax commissioner.

The necessary tax rates and levies were certified by the County; however, they were not approved by
Council.
City of Vermilion
Management Letter
Page 6
OHIO REVISED CODE NONCOMPLIANCE CITATIONS (Continued)

7. Ohio Rev. Code Section 5705.36(A)(1)* states, in part, that on or about the first day of each fiscal
year, the fiscal officer shall certify to the county auditor the total amount from all sources available for
expenditures. The amount certified shall include any unencumbered balances that existed at the end of
the preceding year.

The City did not certify the unencumbered balances until March 28, 2008, which is not within the
required deadline of the first day of the fiscal year.

8. Ohio Rev. Code Section 5705.41(B)* states that no subdivision or taxing unit is to expend money
unless it has been appropriated.

At year-end, expenditures plus prior year encumbrances exceeded appropriations in the following
funds by the following amounts: CDBG fund ($38,884); Water fund ($41,215); Storm Water Drainage
funds ($6,351); and Sanitation Fund ($515)

9. Ohio Rev. Code Section 5705.41(D)* states that Fiscal officers may prepare so-called "blanket"
certificates for a sum not exceeding an amount established by resolution or ordinance adopted by the
members of the legislative authority against any specific line item account over a period not running
beyond the end of the current fiscal year.

It was noted during testing that the city does not have a resolution or ordinance adopted by the
legislative body with an established maximum amount for all “blanket” purchase orders.

10. Ohio Rev. Code Section 135.21 suggests that interest earned on monies deposited by a treasurer
which do not belong in the treasury or interest earned on monies held for the treasury of other
subdivisions is generally subject to Ohio Revised Code Section 135.21. According to ORC §135.21,
all other interest earned must credited to the general fund, with certain exceptions.

This comment is primarily concerned with the exception of Article XII, Section 5a, Ohio Const. and
1982 Op. Atty Gen. No. 82-031that indicates interest earned on money derived from a motor vehicle
license or fuel tax must follow the principal. This includes local motor vehicle license tax imposed
under Ohio Rev. Code Chapter 4504, motor vehicle license tax imposed under Ohio Rev. Code
4503.02, highway use tax, and gasoline tax imposed under Ohio Rev. Code Chapter 5728, and the
motor vehicle fuel tax imposed under Ohio Rev. Code Chapter 5735. [Op. Atty. Gen. No. 1982-031].

Based on the purpose of funds 201, 202 and 203 and nature of the revenues received in these funds,
they are required to receive interest. In addition, fund 214 is setup for the purpose of tracking the
City’s discretely presented component unit and should therefore be receiving its fair percentage of the
interest earned on pooled monies. Fund 201 was unable to maintain a positive balance throughout the
year to substantiate interest revenue; however the following funds should have receipted interest for
the stated amounts.

Fund Fund Name Amount

202 State Highway Fund $1,911
203 Permissive Use Fund $18,606
214 Port Authority $16,211
Total $37,259
City of Vermilion
Management Letter
Page 7

OHIO REVISED CODE NONCOMPLIANCE CITATIONS (Continued)

The City corrected this error on their books with an adjusting entry in fiscal year 2010 and is reflected
on fiscal year 2009 records as 2009 has not been closed out as of our opinion date. Additionally, if the
City intends to post interest to funds other than those required in ORC, a formal interest allocation
policy or ordinance should be approved by Council.

11. Ohio Rev. Code Sections 5705.14-.16 requires a resolution of the taxing authority passed by an
affirmative vote of two-thirds of the members, except in the case of transfers from the general fund.
Transfers from the general fund require a resolution passed by a simple majority, which constitutes a
quorum of greater than 50 percent of the members.

Ordinance 2008-41 authorized the finance director to transfer $3,500 from the general fund to the
water capital improvement fund; however, during review of ledgers, we discovered that $6,100 was the
actual transfer recorded which is in excess of the authorized amount of the majority by $2,600.

The City corrected this error on their books with an adjusting entry in fiscal year 2010 and is reflected
on fiscal year 2009 records as 2009 has not been closed out as of our opinion date.

* A similar comment was made within the prior audit period