May 7, 2012
The Honorable Priscilla Everette-Oates, Mayor
Town Of Princeville
PO Box 1527
Tarboro, North Carolina 27886
Dear Mayor Everette-Oates:
The State and Local Government Finance Division in its role as staff to the Local Government
Commission (“staff”) has analyzed the audited financial statements of the Town of Princeville
(“Town”) for the fiscal year ended June 30, 2011. The audit report identifies a significant number
of material weaknesses in the Town’s internal control structure and demonstrates that the Town is
in poor financial condition. In addition, staff is concerned about the lateness of the audit report,
the circumstances that resulted in a qualified opinion being issued on the financial statements,
and fundamental deficiencies with the Town’s General Fund and the Water and Sewer Fund. The
poor financial condition and lack of internal controls are unacceptable and must be addressed by
the Board. This letter presents the Town’s vulnerable points and should provide an outline for the
immediate Board action needed to rectify these issues.
Material Weaknesses: The audit discloses 19 material weaknesses in the internal control
structure established by the Town. Many of these weaknesses resulted in statutory violations and
questioned costs. These findings touch on every aspect of the Town’s operations and the Board’s
governance and in some cases affect individual employees. They are as follows:
. The Town’s expenditures exceeded its budget in almost every function of operations.
. Per the auditor, all contracts have not been pre-audited as required by the General Statutes
and one contract greater than $10,000 did not have Board approval as is required by Town
policy. State law [G.S. 159-28] requires that all contracts, agreements, and purchase orders
include, on their face, a certificate stating that the instrument has been pre-audited to
assure compliance with The Local Government Budget and Fiscal Control Act.
. The Town did not collect enough of its revenues to fund operations. For the 2010-2011
fiscal year, the Town collected only 74.08% of the ad valorem taxes that it levied,
significantly less than the statewide average of approximately 97%. Utility collections are
insufficient to provide for the operation of the utility system as evidenced by the continued
losses in the Water and Sewer Fund. Both of these items are discussed further later on in
this document.
. According to the audit, the Board failed to fulfill its fiduciary responsibility to adopt,
implement and maintain an adequate system of internal control. The Board has not hired
accounting staff with the appropriate skills to effectively manage operations and utilize
accounting software.
. The audit disclosed that the Town elected to continue to employ its finance officer and allow
her to retain her position after her disclosure of two instances of using public funds to
repair her personal vehicle. These actions voided the Town’s fidelity bond on this employee,
leaving the Town exposed to loss. Once these instances were made public, the Town did
remove this person from the position of finance officer, but the auditor observed her on
many occasions actively participating in the processing of financial transactions.
. As detailed in the findings, the Town did not file and deposit payroll taxes timely, which
could result in potentially material penalty and interest obligations to both the State and
federal governments.
. According to the findings, the Town did not withhold employment and income taxes from
part-time employees, resulting in underpayment of employment taxes by the employee.
One employee was incorrectly paid due to a mathematical error in computing salary. These
omissions resulted in an underpayment of withholding taxes by the Town and an
overpayment of salary to one employee.
. The Town failed to pay employer taxes on part-time employees and did not report those
employees’ wages on W-2s resulting in incorrect employer taxes being paid and incorrect
tax forms being filed, per the auditor’s findings.
. The Town failed to submit $2,446 in contributions to the Prudential Retirement 401 (k)
Plan subsequent to year end in a timely manner.
. As detailed in the audit, the Town has not adopted appropriate procedures for accounting
for travel related expenses. Travel expenses were paid under a non-accountable plan,
meaning all payments should have been reported as wages to the official or employee to
whom they were paid. As a result, W-2s and employer tax forms were incorrect.
. The Town’s accounting records and budget are not maintained on a modified accrual basis
of accounting, as evidenced by the material amount of accounts payable that were not
recorded per the auditor. Due to the extent of material unrecorded liabilities, the auditor
was unable to reach a conclusion that all expenditures of the Town had been recorded.
. The Town’s accounting records and budgets are not maintained on the modified accrual
basis of accounting. Accounts receivable records were “damaged beyond use” per the
auditor’s findings, and some billing journals were not available. Attempts to reconcile
deposit slips to the cash receipts journal were not successful. Utility receivables may be
overstated by a material amount. As a result, the auditor was unable to reach a conclusion
about the accuracy of accounts receivable and the related utility revenues.
. According to the audit findings, there are inadequate controls over bank reconciliations and
the Town does not maintain correct records for its cash accounts, resulting in overdrafts on
several occasions.
. Town staff has not been adequately trained on its accounting software, leaving it dependent
on one employee and its outside consultant, as detailed in the findings in the audit.
. The Town neglected to budget its debt service payments as required by G.S. 159-13(b)(1).
. Per the internal control reports, the Town did not meet the requirements of its federal and
state contracts. The Town did not produce a schedule of federal and state awards as
required, did not disclose the ARRA funding it had received, nor did it obtain wage
certifications as required for employees and contractors paid with ARRA funds. It did not
adopt or implement a corrective action plan to address findings in the prior year’s audit as
is required.
. The Town has not maintained adequate fund balances to provide for future operations.
This is discussed in detail later in this document.
. The Town was not in compliance with the USDA loan requirements based on its loan
agreement because it did not maintain the required reserve fund for debt payments.
. As noted in detail in the audit findings, the Town has not established an appropriate “tone
at the top” and an effective control environment that oversees the strategic direction and
accounting obligations of the Town. The Town has brought in staff that lacks the
appropriate qualifications and training to oversee and conduct the day-to-day business of
the Town.
Late Audit: The Town’s audited financial statements were not received in our office until April
26, 2012, after being due on October 31, 2011. As stewards of the public’s resources, the governing
body is responsible for ensuring that audited financial statements are available to the public in a
timely manner. Audited financial statements received this late precludes the Board from taking
any effective action. Information in the report is needed by various external groups, such as the
North Carolina General Assembly, federal and State agencies that provide funding, and other
public associations. We urge the Board to take the appropriate action to ensure that the audited
financial statements for the current year are completed and submitted by October 31, 2012.
Qualified Opinion on the Financial Statements: The Town received a qualified opinion on its
financial statements because the auditor was unable to obtain sufficient documentation to
substantiate accounts receivable, accounts payable and payroll liabilities as of June 30, 2011. This
is a serious deficiency regarding the Town’s accounting records. The lack of internal controls
contributed significantly to the circumstances that resulted in the qualified opinion being issued.
It is the responsibility of the Board to establish the proper policies and procedures to ensure that
an adequate system of controls is in place. G.S. 159-26(a) requires that each local government
establish and maintain an accounting system designed to show in detail its assets, liabilities,
equities, revenues, and expenditures. The system also should show appropriations and estimated
revenues as established in the budget ordinance and in each project ordinance. For the current
(2012) fiscal year, you should determine the actions that will enable the independent auditor to
express an unqualified opinion and implement those changes as soon as possible. The North
Carolina Department of State Treasurer Policies Manual provides guidance in the areas where
your government is experiencing weaknesses.
General Fund & Water and Sewer Fund Concerns: In addition to the material weaknesses
noted, staff has additional concerns about the status of specific town funds.
. In the General Fund, the percentage of fund balance available for appropriation relative to
expenditures appears to be inadequate to support current operations. As of June 30, 2011,
the amount of available fund balance was 0.46% of total fund expenditures. We noted that
this is a decrease in level of fund balance available for appropriation at June 30, 2010
which was 15.85%. Statewide, the average fund balance available for comparably sized
units was 64.80% of their total General Fund expenditures.
For cash flow purposes, local governments need to maintain adequate amounts of fund
balance to finance their operations during periods of declining revenues. Also, fund balance
represents a reserve that can be used for emergencies and other unexpected expenditures
or to take advantage of financial opportunities that may unexpectedly arise. The Town’s
available fund balance should not be allowed to drop below 8% of total General Fund
expenditures, which is equal to one month’s average expenditures. The Board should
analyze its budget ordinance for the current fiscal year and determine which expenditures
can be reduced and/or which revenues can be increased to begin building General Fund
reserves.
. Certain expenditures were made in excess of appropriations authorized by the budget
ordinance, including debt service payments. North Carolina has very specific guidelines
regarding the preparation and adoption of the budget ordinance, and the Town should take
care to ensure that it complies with these requirements. G.S. 159-13(b)(1) specifically
requires the Town to appropriate the full amount of debt service that the finance officer
estimates will be required during the upcoming budget year. This appropriation takes
precedence over all other appropriations by the Town. In future budget ordinances, the
Town should ensure that all debt service payments are budgeted as required.
Based on the budget over-expenditures, it appears that the unit’s pre-audit process is not
functioning as it should. The North Carolina Local Government Budget and Fiscal Control
Act requires that an expenditure be budgeted prior to the Town entering into the
obligation, not simply before the check is written to pay the bill. Over-expenditures occur
when commitments are made or funds are expended without ensuring that adequate
amounts are included in the budget to allow for such commitments or expenditures.
The finance officer and his/her sureties are legally liable for any sums that are disbursed
without an authorized appropriation. Accordingly, the budget must be amended to allow
for the otherwise unauthorized expenditure before making any disbursement of funds.
[G.S. 159-13, 159-15, 159-25, 159-28(b) and (e)]. The North Carolina Department of State
Treasurer Policies Manual contains a section on budgeting that provides guidance in
establishing and maintaining budgetary controls. A copy of this section can be downloaded
from our website at http://www.nctreasurer.com. Select “Divisions” followed by “Local
Fiscal Management” under “State and Local Government” and “Audit and Policies
Manuals” in the right-hand column.
. The General Fund received transfers of $30,000 from the Water and Sewer Fund. Without
these transfers, the General Fund would have reported an even weaker financial condition;
the General Fund should not rely on transfers from other funds to support its operations.
Because utility customers and property taxpayers are not necessarily the same groups of
people, it is important for equity reasons to ensure that the General Fund and the Water
and Sewer Fund are self-supporting. This means that utility customers should not
subsidize general government operations. Also, the Water and Sewer Fund owes the
General Fund over $11,000. The Water and Sewer Fund should have repaid the General
Fund before transferring any additional funds. The Town should maintain the records and
accounts for these two funds separately to decrease the instances when cash is moved
between the Funds.
. The Water and Sewer Fund reported a net loss on both the full accrual and budgetary basis
of reporting, indicating that revenues do not provide sufficient resources to cover the cost of
providing services to customers.
. Current liabilities exceeded liquid assets, indicating that the Water and Sewer Fund may
not have sufficient liquid resources to meet its current obligations.
. The Town continues to borrow heavily between the General Fund and the Water and Sewer
Fund to meet cash flow needs. Cash flow from operations was negative, indicating that the
operation did not generate enough cash inflows to meet the cash outflows necessary to
provide services to your customers. Given the poor financial condition of the Water and
Sewer Fund, it should not provide support to the General Fund at this time.
. The Town continues to allow customers to fall behind on their water payments without the
consequence of cutting off the water to the structure.
. In October, 2009, the Town entered into a loan agreement through the Department of
Environment and Natural Resources for water meter replacements. This loan was
approved by the LGC based on representations made by the Town that it would properly
manage water and sewer finances. The audit shows that the Town has not operated its
water and sewer system in a manner that provides adequate funds for operations and
repayment of this debt.
Conclusion
It is clear from the pervasive nature of these findings that the Town faces serious deficiencies in its
operations and its governance. The problem areas addressed in this letter require immediate
corrective action. Specifically the following items must be addressed:
. Due to the numerous errors and omissions in the payroll area, corrections to the records
must be made and all W-2s, 1099s and employer reporting forms for at least the 2011 and
2010 calendar years must be redone. It is possible that some or all forms from prior years
will need correcting as well.
. The Board and staff need to gain a complete understanding of the pre-audit function and its
implications on Town operations. The General Statutes require that in order for the
finance officer to issue a valid pre-audit certificate, the budget must be in place for an
obligation before the obligation is incurred. In this way spending is controlled at the
beginning of the transaction rather than at the end when the bills come due. If there is not
sufficient budget to cover an obligation, the Town should not incur the obligation until the
budget has been amended; alternatively the Town could decide not to incur the obligation
altogether. Strict budgetary control is essential to building much needed reserves.
. The Town needs a well-trained, qualified finance officer and manager in order to implement
the many corrective actions that need to occur. We strongly encourage you to seek the
assistance of the North Carolina League of Municipalities in your search for qualified staff.
. Collections in the Water and Sewer Fund must be improved. The Town must adhere to its
new policy of requiring payment from all customers and it must enforce the consequences of
non-payment in a uniform manner. Given the difficulty the Town has had in effectively
and efficiently operating its Water and Sewer system, the Town should consider shifting
system operations to another governmental entity to run on behalf of the Town. This move
would not interrupt service in any way to the citizens of Princeville but would relieve the
Board of its responsibilities in managing the system.
. The Board and staff must gain an understanding of basic internal and accounting controls
necessary to function according to the Statutes and generally accepted accounting
principles. Attached to this letter are two memorandums issued by the SLGFD staff which
detail the assignment of responsibilities in a small government. We encourage you to
review your staff assignments and realign them in accordance with the plans outlined in
these documents. Diligent Board oversight and involvement will be required in order to
improve your overall control environment.
. Travel expenditures must be documented in accordance with IRS requirements in order for
travel costs paid with Town funds to not be considered wages. We strongly encourage you
to review IRS Publication 463 – Travel, Entertainment, Gift and Car Expenses – as you
develop your Town travel policies.
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. The Board must develop a plan to improve the tax collection process. We encourage the
Town to work with Edgecombe County to determine what steps might be taken by both
parties to improve the collection percentage.
It is imperative that the Board work together to make the necessary improvements to the Town’s
financial operations. The Local Government Commission staff requests a response to this letter by
June 4, 2012. As a part of your response, include the following items:
. A detailed copy of your corrective action plan specifically addressing each finding in the
audit and the concerns laid out in this letter;
. A working draft of the 2012-2013 budget;
. Monthly interim financial information from September 2011 through the present;
. Signatures by the members of the Town’s board as evidence that Board members
understand the gravity of the issues that it faces in restoring fiscal health to the Town.
Our staff is available to assist you as you develop and implement your corrective action plan.
Please contact us with any questions at (919) 807-2381.
Sincerely,
Sharon G. Edmundson, CPA
Director, Fiscal Management Section
cc: Maggie Boyd, Interim Town Manager
Isabelle Andrews, Commissioner and Finance Officer
Gwendolyn Knight, Commissioner
Ann Howell, Commissioner
Isabelle Purvis-Andrews, Commissioner
Calvin Sherrod, Commissioner
Phyllis Pearson, CPA, Petway, Mills & Pearson, CPA, P.A.
C.D. Watts, Attorney
Maggie Boyd, Interim Town Manager
Town Of Princeville
PO Box 1527
Tarboro, North Carolina 27886
Isabelle Andrews, Commissioner and Finance Officer
Town of Princeville
725 Greenwood Blvd.
Princeville, NC 27886
Phyllis Pearson, CPA
Petway, Mills & Pearson, CPA, P.A.
P.O. Box 1036
Zebulon NC 27597
Gwendolyn Knight
318 S. Main St
Princeville, NC 27886
Ann Brown Howell
400 Mullins Street
Princeville, NC 27886
Calvin Sherrod, Commissioner
909 King Avenue
Princeville, NC 27886
C. D. Watts, Attorney At Law
762 Ninth Street #553
Durham, NC 27705
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