To:  Mike Wildgen, City Manager

From:  Ed Mullins, Finance Director

Date:  July 28, 2005

Subject:  Audit Management Letter

            Attached is the Management Letter that our auditor, Tom Singleton, prepared in conjunction with the 2004 financial audit.  The letter includes three items that the auditor feels would strengthen internal controls.  The three items and a response by the Finance Department are listed below.

            1.  We recommend that the City’s Attorney review all tri-party security agreements between the City, the banking institution serving as the depository bank and the banking institution serving as the security agent.

            The auditor’s concern in this area is to insure that the collateral pledged by our depository bank is perfected and can be distributed to the City in case of the failure of the banking institution.  Under Federal law, to be binding, the security agreement must be in writing, be approved by the board of directors, and be an official record of the institution. 

            The City of Lawrence has received the attached “Secretary’s Certification” that approves the KBA standard Security Agreement as required for municipal deposits.  The resolution was approved by Central National Bank’s board of director’s on April 11, 2002.  The Finance Department encourages the Legal Department or City Attorney to review the documentation to ensure that the City’s interest is protected.

            2.  Charitable contribution substantiation requirements place a burden on the donee organization.  Donations to a municipality are defined as charitable contributions.  Any single contribution of $250 or more must be supported by written documentation.

            The Parks and Recreation department was contacted to determine if any documentation to donors were being prepared.  The Director stated that the Parks and Recreation sends out the required documentation for contributions made to that department.  It is not known at this time what other city departments, if any, receive charitable contributions.

            To adequately address, the issue the preparation of an Administrative Policy that provides the procedure to follow in the case of charitable donations of $250 is recommended.

            3. An individual independent of the bank reconciliation process should review and approve the bank reconciliations for timeliness of completion, clerical accuracy and proper supporting documentation.

            The Finance Director reviews the bank reconciliations performed by the Accountant.   The Accountant signs and dates the bank reconciliation upon its completion and forwards it to the Finance Director.  The Finance Director reviews the reconciliation.  The review includes matching the adjusting entries to either the bank statement or general ledger as appropriate.  After the review, the Director signs and dates the report.  Since the Director is not responsible for generating any of the adjustments or preparing the reconciliation, he is considered to be independent of the process.

            The Auditor also lists four accounting pronouncements that will apply to the City of Lawrence in future years.  As part of her annual review, the Accountant was requested to prepare a table summarizing the effective dates and reporting requirements of the new accounting requirements and to list recommended actions the City should consider for their implementation.