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PDR-2011-07-14:Layout 1.qxd - Philadelphia Public Record

Controller Finds 7 Big Weaknesses In City’s Financial Statements

City Controller Alan Butkovitz

today released the findings from his

audit of the City’s Fiscal Year 2010

Comprehensive Annual Financial

Report that included seven separate

conditions resulting in a material

weakness over the City’s ability to

properly report its finances.

A material weakness is determined

to exist when there is a “reasonable

possibility” that the process used to

prepare a financial report will not

prevent or detect and correct mistakes

in the report on a timely basis.

“Our Office is required by auditing

standards to report material weaknesses

so that management can take

corrective action and ensure investors

and bond rating agencies of

timely, accurate, and reliable financial

information for making informed

decisions,” said Butkovitz.

The seven conditions contained in

the material weakness include the

following:

• continued staff turnover and reductions

in the city’s Finance Office,

compromising the process necessary

for preparing an accurate CAFR;

• poor procedures to ensure accurate

reporting of city receivables;

• lack of procedures for preparing

the deposits and investments

footnote, which led to numerous

misclassified or omitted deposit

and investment accounts;

• insufficient procedures to make

certain the City’s Water Fund is

accurately reported;

• failure to obtain timely financial

statements from component units

included in the CAFR;

• inadequate accountability over departmental

custodial accounts; and

• failure to automate the year-end

closing process for the city’s Aviation

Fund to decrease the risk for

financial statement errors.

According to Butkovitz, over the

past decade, the Accounting Bureau’s

staff size has been reduced

from 64 positions in fiscal year

2000 to 45 in fiscal year 2010,

which is a 30% reduction.

“As a result, top managers are now

being forced to prepare significant

sections of the CAFR, eliminating

their independent review of CAFR

work that would normally be performed

by subordinates – and in

turn reviewed by them in their supervisory

role,” said Butkovitz.

“Consequently there was, and still

remains, an increased risk of errors

in financial reporting.”

“During the course of this audit my

staff found $1.1 billion in errors

which were ultimately corrected by

the City,” said Butkovitz. “While I

understand the budget constraints facing

all city departments, it is imperative

for the Finance Office to have the

appropriate number of staff to ensure

that the financial statements and information

presented are accurate.”

Along with the material weakness,

another finding included the Dept.

of Human Services’ ongoing failure

to submit quarterly reports of expenditures

for reimbursements

within the required 45 days of the

end of reach quarter. For all of fiscal

2010, DHS had been consistently

late in submission of the reports.

“With the city experiencing fiscal

constraints, timely reporting of Act

148 reimbursement invoices would

have improved the City’s cash flows,”

said Butkovitz. “I strongly urge DHS

to comply with Act 148 and submit

their reports for reimbursement

within the mandated 45 days.”

The Controller’s other concerns

from the audit report include:

• The city’s lack of a comprehensive

capital asset system.

• Inadequate inventory procedures

for all city real property.

• Continuing concerns with the operation

of the Basis 2 Water

Billing System.

• The failure to revise the city’s

Standard Accounting Procedures

to reflect various automated processing

applications and practices

currently in use.

• Non-compliance with Act 148 reporting

requirements.

To view a copy of the Fiscal Year 10

Audit Report on Internal Control and

on Compliance and Other Matters

pertaining to the City’s CAFR, please

visit the City Controller’s website at

www.philadelphiacontroller.org.

4 | THE PHILADELPHIA DAILY RECORD 14 JULY, 2011

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