The Board has not established adequate financial policies and procedures. While the Board has adopted a code of ethics, it has not adopted purchasing and investment policies, as required by statute. The Board also has not ensured that written procedures concerning financial recording and reporting were developed. While we found that the Treasurer does submit monthly financial reports to the Board, the informal bank reconciliations prepared by the Treasurer were not a part of those reports. Moreover, the Treasurer performs all duties with no Board oversight. Also, the Board does not conduct an annual audit of the Treasurer's records nor do they contract with an independent auditor to perform such an audit.

District controls are not adequate to ensure that financial activity is properly recorded and reported, and that District moneys are safeguarded. While the Board has adopted a code of ethics, it has not adopted investment or procurement policies. Additionally, although the Treasurer prepares monthly reports to account for the District's financial activities and files an annual update document with the State Comptroller's Office each year, the Treasurer does not present the Board with budget-to-actual reports for expenditures on a monthly basis. The Board authorizes each claim for payment and indicates its approval by affixing each member's signature on the warrant and on each attached invoice; however, the Board has no process in place to verify it is approving all claims for payment because the Board is not reviewing monthly bank statements or bank reconciliations. Furthermore, although the Board contracted with an independent accountant to perform an audit of the Treasurer's records for the 2010 fiscal year, the 2011 and 2012 records had not been reviewed as of July 31, 2013.

The District does not have adequate financial policies and procedures. The Board has not adopted purchasing, investment, or code of ethics policies, as required by statute.

The Board has not established policies and procedures related to personal, private and sensitive information (PPSI) and sanitizing computer equipment onsite before disposal. In addition, the Board has not instituted policies and procedures to protect data resources. Town officials do not maintain a complete and accurate computer inventory and have not developed an information technology (IT) disaster recovery plan. Because of these weaknesses, IT assets are at risk for unauthorized, inappropriate and wasteful use. Additionally, in the event of an IT disaster or breach, there is no formal plan of what action Town officials should take to restore service or notify those whose personal information has been compromised.

We reviewed budget-to-actual results for the fiscal years 2010 through 2012 and found that the Council adopted realistic budgets. The Chamberlain monitored the budget with actual results, and City officials made budget transfers as needed throughout the year. In addition, City officials have prepared multiyear financial plans. However, the Council has adopted budgets that have routinely relied on the appropriation of fund balance as a financing source, causing the City to incur planned operating deficits in the general fund. This has led to a significant reduction in the City's unexpended surplus funds from 2010 to 2012. During that period, the unexpended surplus funds remaining at year end declined 84 percent − from $841,747 in 2010 to $136,068 at the end of 2012 − leaving the City with little cushion for managing unforeseen events. Because the City has drawn down its unexpended surplus funds to a dangerously low level, it no longer has fund balance available as a financing source in its 2014 budget.

The Board has not taken appropriate actions to maintain the general fund's sound financial condition. From 2008 through 2011, the general fund's results of operations aggregated to net operating deficits of $8.9 million, mainly due to over-estimation of certain revenues in adopted budgets. Although the general fund reported an operating surplus of almost $1.5 million in 2011, this surplus resulted from $4.5 million of questionable inter-fund revenues. Had the Town not recognized this revenue, the general fund would have reported an operating deficit of $3 million for 2011. From 2008 through 2011, the general fund's unexpended surplus fund balance decreased from a surplus of $6.1 million to a deficit of $10.5 million. This decline resulted from adopting budgets that were not structurally sound and using temporary loans to purchase investment properties held for resale. These temporary loans required $26.5 million of fund balance to be reclassified from unexpended/unassigned to restricted and non-spendable. In the event those properties are sold, most of the fund balance will remain as non-spendable until the general obligation bonds issued to finance the purchase of the properties are liquidated. Between 2008 and 2011, the residential garbage district fund made 17 cash advances to the general fund, totaling almost $28 million, to purchase property. None of the 17 cash advances were authorized by the Board, the advances were not paid by the end of each fiscal year, and no interest was paid on these temporary loans as required by law. We question also whether the $5.7 million allocated to the residential garbage district and commercial garbage district funds during fiscal years 2010 and 2011 are legitimate charges attributable to those funds. The Town also paid $203,848 in health insurance premiums for nine officials and employees and $30,751 to four other employees and officials who opted out of the health insurance plan during the audit period, even though none of these individuals were eligible, or otherwise authorized by the Board, to receive such benefits. Finally, the Board has not adopted a comprehensive computer-use policy, a breach notification policy, or a formal disaster recovery plan. In addition, users of the financial software have access rights to sections of the software that are not necessary for their job duties.

While the School's credit card policy adequately addresses many control procedures, certain additional controls should be considered. The policy does not define how many credit card accounts may be established, limit the number of credit cards to be issued, or address to whom the cards may be issued. The policy also does not define credit limits. We also found that the School did not ensure that all employees who were issued a credit card signed the policy to acknowledge their awareness of the procedures, as required by the policy. We found that, of the 12 employees issued credit cards, only seven had signed a copy of the policy. In addition, School officials did not ensure that credit card accounts were established in a manner that complied with the policy provision prohibiting cash advances. The School also has a debit card policy, which provides appropriate guidance regarding proper usage and pre-approval requirements.

The proposed budget includes $2 million of anticipated revenues from the sale of real property. We have not been provided documentation to verify the assessed values of the properties or the required approval from the Environmental Protection Agency regarding the readiness of the properties for sale. If all of these properties are not sold within the 2014 budget year, the City will experience a revenue shortfall of up to $2 million. Based on estimates of the current year's billings and no changes to the customer base or rates, the City may be overestimating water sales by approximately $280,000 and sewer charges by approximately $272,000 in the 2014 budget. The 2014 budget does not have any fund balance appropriated for any revenue shortfalls. If the City Council does not decrease appropriations, there may be a revenue shortfall of approximately $552,000 in the 2014 fiscal year budget for these funds. The City's 2014 budget also includes an appropriation of $561,000 of fund balance. If the planned property sales do not occur and no other changes are made to the budget, City officials will have to use $2 million of fund balance to cover the shortfall.

The City's proposed budget, while generally reasonable, needs improvement to make it a better tool for prudently managing the City's resources. The sewer fund continues to display a trend of weakening financial position and the proposed increases in revenues for the sewer fund's 2014 budget do not appear reasonable. The City's 2014 proposed budget includes a transfer of $2.5 million from the water fund to the general fund which, if the water fund realizes similar results of operations in 2014, will likely cause a decrease in the fund balance of the water fund. The City's 2014 proposed budget does not appropriate enough money for contingencies to provide adequate flexibility to pay for unanticipated costs. The City's 2014 proposed budget provides only minimal funding for capital improvements; the City's 2014 capital plans are underfunded by over $1.4 million. The City's proposed budget is in compliance with the tax levy limit.

Even though the Board received monthly budget-to-actual reports from the Supervisor, it did not develop and adopt accurate budgets that were based on realistic estimates of revenues and expenditures. Additionally, the Board has not adopted a policy and Town officials have not developed procedures to govern the level of unexpended surplus funds maintained. As a result of the flawed budget process, the Town has accumulated excess unrestricted fund balances in the general and water funds. The general fund's excess unrestricted fund balance is 128 percent of the ensuing year's budget and the water fund's excess unrestricted fund balance is 75 percent of the ensuing year's budget. Furthermore, the Board's poor budgeting has generated operating surpluses of almost $1.86 million in the general fund.

The internal controls in the Justice Court were not adequately designed and operating effectively. We found a cash shortage of $1,814 in one of the Justice's accounts and identified 11 missing receipt numbers in the computer system for which there was no documentation. Further, all three Justices either performed inadequate bank reconciliations or did not perform them at all. Although the Board audited the Justices' records, the audits failed to identify the control weaknesses, the cash shortage, or the lack of bank reconciliations. Additionally, the Clerk did not establish adequate controls over her financial activities and the Board did not establish effective monitoring controls. We also found that the Town has applied its substantial revenues from wind power to reducing the taxpayers' burden and increasing the Town's unassigned fund balance. The tax levy decreased from about $659,000 in 2006 to about $302,000 in 2013 (a 54 percent reduction). Although we commend Town officials on their use of these moneys to reduce the tax levy and build fund balance, we urge the Board to consider developing a comprehensive, multiyear financial and capital plan for the use of the wind power revenues.

The Board-adopted credit card policy authorizes issuing credit cards to certain District officials. The policy states that each credit card purchase is limited to $2,500 and must be documented by submitting a receipt which specifies the purchase date, amount, location, reason, item description, and the purchaser's name. However, this policy does not require bonding insurance for all individuals who are issued District credit cards. We found that the only individual bonded was the Treasurer. Therefore, we reviewed all 158 credit card purchases totaling $25,500 made during our audit period. Our review disclosed that District officials made 26 credit card purchases totaling $1,609 that did not include all the supporting documentation required by the District's credit card policy. Additionally, 19 credit card purchases totaling $11,635 circumvented the District's procurement policy that required documentation for solicited quotes.

The Board did not adopt realistic budgets, did not adequately monitor and adjust the annual budgets, and did not adequately monitor the Town's financial operations to ensure fiscal stability. As a result, the Town's general town-wide fund's unexpended surplus funds declined from $169,198 as of January 1, 2010, to a deficit of $28,226 as of December 31, 2012, while the highway part-town fund's unexpended surplus funds declined from $63,773 to a deficit of $29,228 for the same period. The general town-wide and highway part-town funds have had operating deficits during the last three fiscal years because the Board over-appropriated fund balance and over-estimated revenues.

The Board did not ensure that Town officials followed statutory bidding requirements or the Town's procurement policy. We identified approximately $301,000 in purchases that were not properly bid as required by law, and approximately $94,000 in purchases that did not have quotes as required by Town policy. Additionally, Town officials stated that items were purchased through State or county contract but they did not confirm that they received the appropriate contract pricing and did not have documentation to that effect. Our comparisons of items and prices against State and county contracts indicated that the purchases were not made through OGS or county contract. Further, the required prior Board approvals of purchases exceeding policy thresholds were not obtained.

The Board has adopted budgets that relied too heavily on appropriated fund balance as a financing source. As a result, the financial condition of the general, highway, and lighting district funds has diminished in recent years, resulting in fiscal stress. As of December 31, 2012, the general and highway funds reported unexpended fund deficits of $24,853, and $31,823, respectively, and the lighting district fund had unexpended surplus funds of only $2,598. We also found that the Board does not receive monthly budget status reports or cash balances to monitor the Town's financial condition and that the Board did not develop a multiyear financial and capital plan to address the Town's long-term priorities.

The Town's budgets from fiscal years 2009 through 2012 were unrealistic. Total actual revenues during this period were approximately $1.3 million more than budgeted, and total expenditures during this period were $340,669 less than appropriations. These unrealistic budgets caused unexpended surplus fund balance to increase significantly. At the end of 2010, the Town had $2.7 million in unexpended surplus fund balance, which was more than double the ensuing year's appropriations. Further, at the end of fiscal year 2012, the Town had $1.3 million of unexpended surplus fund balance, which was projected to remain above 100 percent of the 2013 fiscal year's appropriations. The Town continues to levy taxes unnecessarily even though it has excessive fund balance. Further, the Board has not developed a multiyear plan for the use of fund balance.

The Board did not develop hiring policies and payroll procedures for managing the Town's payroll process. Sixty employees began work and were paid $28,210 between February and June 2012 prior to the Board's approval of their employment and pay rates. Further, Highway employees were paid $1,413 for time not worked when they left work early and one employee earned leave accruals to which she was not entitled. In addition, we found that Highway employees were overpaid $1,861 due to incorrect pay rates. We also found that the Board failed to establish uniform and consistent procedures for employees to record the request, approval, and use of leave. As a result, leave records were not accurately maintained and may have resulted in employees receiving payment for leave time to which they were not entitled. Finally, payments totaling $8,519 were made for compensatory time without the Board's written approval.

As of December 31, 2012, the Board accumulated unexpended surplus funds in the general fund totaling $458,698, which were excessive compared to the 2013 budget of $255,420. This primarily occurred because the Board underestimated budget revenues in previous years and did not adopt a policy to govern the level of fund balance to be maintained. The Board also did not develop a long-term financial to ensure unexpended surplus funds will be used as this Board intends, or in other ways to benefit taxpayers. Lastly, the Board did not audit the records and reports of the Supervisor or Town Clerk-Tax Collector. As a result, the Board is at risk of failing to detect and correct errors, irregularities, or fraudulent activity.

The Board adopted budgets for the general fund that were not structurally balanced; instead the Board routinely relied on appropriating significant amounts of fund balance to finance operations. In addition, the County's enterprise health fund and enterprise refuse and garbage fund were not self-sufficient and, therefore, required subsidies from the general fund through both interfund transfers and advances. County officials also did not ensure that interfund advances from the general fund to the enterprise funds were fully repaid by the close of the fiscal year. As a result, the general fund realized planned operating deficits, a declining fund balance, and a declining cash balance from 2010 to 2012. The County's financial condition will likely decline further during 2013 because the Board has adopted budgets for the general fund, enterprise health fund, and enterprise refuse and garbage funds for 2013 using the same budgeting practices. County officials' failure to establish comprehensive written policies and procedures for the preparation and processing of payroll and leave time accruals has resulted in a lack of segregation of duties and lack of compensating controls. As a result, we found that employees were both over and underpaid and that employees' leave accrual records were not properly maintained. Finally, County officials have not properly limited users' access within the computerized payroll systems and have not generated and reviewed change reports from these systems.

The Board has not adopted a policy and Town officials have not developed procedures to address the level of unexpended surplus fund balance to be maintained. The Board's overly conservative budgeting practices have resulted in the Town continuing to maintain excessive unexpended surplus fund balances in all four major operating funds. At the end of the 2012 fiscal year, the unexpended surplus fund balance of the general town-wide fund was 69 percent of budgeted appropriations for 2013, the general town-outside-village fund was 106 percent, the highway town-wide fund was 63 percent, and the highway town-outside-village fund was 85 percent of 2013 appropriations. In addition, internal controls over cash receipts in the Clerk's office were not appropriately designed or operating effectively, which provided the Clerk/Tax Collector with an opportunity to misappropriate funds. Had the Board ensured that proper controls were in place, it may have been in a better position to detect or prevent the shortage of $3,385 in tax receipts and $400 in Clerk receipts as of March 7, 2013. Finally, had the Board conducted the annual audit of the Justice Court, it may have been in a position to detect the shortage of $105 at March 31, 2013.