Author: Financial Management Resource Bureau
The DLS Financial Management Resource Bureau (formerly the Technical Assistance Bureau) has offered financial management advice to municipalities across the state for over 30 years. To share this guidance more broadly, we thought it would be helpful to highlight some of our more useful, timely, or interesting recommendations for the benefit of City & Town readers.
An audit is an examination of systems, programs, and financial data intended to provide independent assurance that a community’s financial statements are reliable, accurate, and complete. An audit also confirms that financial checks and balances are in place to protect public assets. As a matter of best practice, communities engage certified public accountants to conduct independent audits of their financial records to review operating procedures, verify financial controls, and comment on management practices in a formal, transparent process.
An audit generally has three components: an opinion, financial statements and supplementary information, and a separate management letter.
- An auditor’s opinion is a certification that accompanies the financial statements when the audit is conducted in accordance with generally accepted auditing principles (GAAP). An unqualified, or unmodified opinion is issued when the auditor concludes the financial statements are free of material misstatements. A modified or qualified opinion is an adverse opinion given when the financial statements have not followed GAAP in all financial transactions.
- Basic financial statements comprise the government-wide financials, fund financial statements, and notes to the financial statements. The supplementary information is a series of supporting schedules to provide additional community and financial detail.
- The management letter is the independent auditor's written communication to city and town officials identifying any areas of deficiency and presenting recommendations for improvements in accounting procedures, internal controls and other matters. A deficiency in internal control exists when the design or operation of a control does not allow officials to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, that create a reasonable possibility a material misstatement of the financial statements will not be prevented, or detected and corrected, on a timely basis.
Because it is essential that financial records, accounts, transactions, accounting practices and internal controls are accurate and reliable, we recommend all communities conduct audits annually. Some communities have codified an annual audit requirement through ordinance or bylaw, whereas other communities with limited resources elect to conduct audits every two or three years. However, infrequent audits generally take more time due to the auditor’s inability to rely on the accuracy of the prior year’s activity. Consequently, the extra time and effort required to verify the accuracy of previous balances, along with determining needed adjustments, are reflected in the auditor’s fee. Additionally, communities expending at least $750,000 in federal funds (received directly from the federal government or indirectly through a state agency) in a fiscal year are required to be audited in order to comply with the Federal Single Audit Act.
We also make the following additional recommendations regarding annual audits:
- Solicit competitive bids for independent audit services every five to eight years to mitigate the risk of complacency and get a fresh look at the community’s financial procedures.
- Require a management letter when contracting for an auditor. Communities should retain the option to include the financial team’s response to any findings or recommendations by outlining proposed corrective action or improvement before the management letter is formally issued.
- Schedule the auditor to appear before the select board or council to discuss the results of the audit and what procedures or actions need to be taken to strengthen internal controls in the future.
- Develop a written corrective action plan with specific goals, objectives, and deadlines to address each accounting and management control issue raised in the auditor’s report. Policymakers should be periodically briefed on the finance team’s progress towards remedying the problems and meeting plan objectives.
Communities with a history of substantial audit findings, whether in number or severity, should consider establishing an audit committee. An audit committee can monitor the audit progress, review the auditor’s final report and accompanying financial statements, attend the auditor’s exit conference, and monitor any corrective action plans. The committee can also manage the selection process for an independent audit firm by developing criteria, reviewing prospective bids, and making a hiring recommendation. Lastly, the committee can identify areas where expanded scope audits or internal control reviews might be appropriate.
When forming an audit committee, the committee’s responsibilities should be clearly defined by ordinance or bylaw. To avoid the potential or the appearance of conflict, the audit committee should exclude any municipal management or staff who would be subjects of the audit. While members of the finance committee, select board, or city council are potential committee members, local officials may want to seek out citizens with relevant expertise, such as professional backgrounds in accounting, finance, or management.
To be of greatest value, a successful audit requires good communication and involvement between the community and the auditor. Communicating deficiencies and risks to the community is critical to the financial well-being of the city or town. Regularly completed and monitored audits can enhance accountability and provide a valuable management tool for assessing the fiscal performance of a government. This information is especially valuable when municipal credit rating agencies review and report on a city or town’s fiscal condition. The end result can help build taxpayer confidence in government operations and ensure proper oversight of the city or town’s fiscal condition.
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Editor: Dan Bertrand
Editorial Board: Marcia Bohinc, Linda Bradley, Sean Cronin, Emily Izzo, Lisa Krzywicki and Tony Rassias
| Date published: | December 15, 2022 |
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