Fort Walton Beach — Comprehensive Financial Report September 30, 2021 — reading text

deficiencies in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected and corrected on a timely basis. A significant deficiency in internal control over compliance is a deficiency or a combination of deficiencies in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Fort Walton Beach, Florida March 8, 2022 142  CITY OF FORT WALTON BEACH, FLORIDA SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2021 I. SUMMARY OF AUDITORS' RESULTS Financial Statements Type of auditors' report issued: Unmodified Internal control over financial reporting: • Material weakness(es) identified? X Yes No • Significant deficiency(ies) identified? X Yes No Noncompliance material to financial statements noted? Yes X No Federal Awards Internal control over major programs: • Material weakness(es) identified? Yes X No • Significant deficiency(ies) identified? Yes X No Type of auditors' report issued on compliance for major programs: Unmodified • Any audit findings disclosed that are required to be reported in accordance with Uniform Guidance? Yes X No Identification of major programs: Assistance Listing No. Name of Federal Program 21.019 Coronavirus Aid, Relief, and Economic Security (CARES) Act 97.044 Assistance to Firefighters Dollar threshold used to distinguish between type A and type B programs: $ 750,000 Auditee qualified as federal low-risk auditee? Yes X No 143  CITY OF FORT WALTON BEACH, FLORIDA SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2021 II. FINANCIAL STATEMENT FINDINGS FINDING 2021-001 – RECONCILIATION OF GRANT ACTIVITIES Criteria The City’s internal control over financial reporting is designed to allow for management and employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, a material misstatement on a timely basis. Pursuant to GASB Statement No. 33, recipients of expenditure-driven grants should recognize revenue as qualifying expenditures are incurred. Condition The City provided schedule of grant revenues and expenditures, including unearned revenues and receivables, did not reconcile to the accounting records and other supporting documentation. Cause Reconciliation of grant activities for financial reporting purposes was not prepared and reviewed on a timely basis by appropriately experienced and trained personnel. While the City has a written policy for grant administration activities, that policy does not provide the guidance necessary to facilitate financial reporting of grant activities in accordance with U.S. general accepted accounting procedures as well as preparation of the Schedule of Expenditures of Financial Awards (SEFA) required by the Uniform Guidance. Effect Various audit adjustments were proposed and accepted by management to properly reconcile grant activity for financial reporting purposes and to prepare the SEFA. Recommendation  Management should adopt written policies and procedures for identifying and reconciling expenditure-driven grant revenues with related qualifying expenditures.  These policies should reflect who is responsible for preparing and reviewing the reconciling schedule of grant activities for financial reporting purposes as well as preparation of the SEFA. Management’s Response Concur. The Finance Department will adopt written policies and procedures for identifying and reconciling expenditure-driven grant revenues with related expenditures/expenses. The Finance Director will present a policy update to the City Manager to ensure this practice is implemented. 144  CITY OF FORT WALTON BEACH, FLORIDA SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, 2021 II. FINANCIAL STATEMENT FINDINGS – CONTINUED FINDING 2021-002 – COMPREHENSIVE ACCOUNTING POLICIES AND PROCEDURES / DEPARTMENT STAFFING Criteria The City’s internal control over financial reporting is designed to allow for management and employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, a material misstatement on a timely basis. Condition The City does not have written policy that outlines the nature and types of general ledger and account reconciliation reviews that should take place on a monthly, quarterly and year end basis in a centralized location. There were several correcting journal entries proposed by management after the year-end financial information was provided to auditors in January 2022. Cause There is not sufficient time for City staff to accomplish a robust review of the final trial balances, due to the lack of cohesive and comprehensive accounting policies and procedures that identify all tasks, particularly year end closing considerations. In addition, there is inadequate accounting department staffing for the volume of accounting activities to be performed and reviewed throughout the year. Effect The system of internal control over financial accounting and reporting is not functioning as designed for the year ended September 30, 2021. Recommendation  The City should adopt a comprehensive and cohesive set of written policies outlining accounting and financial reporting procedures and activities.  These policies should outline the personnel responsible for performing and reviewing each task as well as the timeframe for completion. In addition, management should establish more effective review and reconciliation policies and procedures, as a customary part of the accounting process, to perform more frequent reviews of the general ledger activity throughout the year.  The accounting department has been unable to fill a vacant senior accountant position. City management needs to evaluate the pay scale along with advertising strategies for the position. Management’s Response Concur. Management is in the process of revising outdated policies regarding the timing of general ledger account reconciliations. The City is actively trying to hire additional professional staff to facilitate the performance of a robust accounting review of work performed on a timely basis. 145  City of Fort Walton Beach “The Treasure of the Emerald Coast” 107 Miracle Strip Parkway SW * Fort Walton Beach, FL 32548 (850) 833-9504 * Fax (850) 833-9640 www.fwb.org SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS YEAR ENDED SEPTEMBER 30, 2021 I. FINANCIAL STATEMENT FINDINGS FINDING 2020-001 – BANK RECONCILIATIONS Condition Bank reconciliations were not performed on a timely basis at the end of each month from October 2019 through February 2020. Bank reconciliations were timely prepared and reviewed starting in April 2020 and throughout the rest of the fiscal year. The City does not have a written policy that requires bank reconciliations be prepared within a designated time period after the end of the month, however it has instituted a standard operating procedure requiring the reconciliations to be reviewed and approved within 15 days of year end. Current Status Corrective action was taken. FINDING 2020-002 – AUDITOR PROPOSED JOURNAL ENTRIES Condition Several audit adjustments were then necessary to properly reflect account balances as follows:  Adjustments to correct opening fund balance to the prior year audited balances;  Adjustments to capital outlay transactions involving accounting for trade-ins;  Adjustments to capital outlay transactions involving equipment acquired via capital lease;  Accruing payables that related to FY20 that were recorded as expenditures in FY21;  Accruing revenue on cost-reimbursement grants to match qualifying expenditures in FY20;  Adjustments to debt payments in the enterprise funds that were recorded on the modified accrual basis of accounting rather than the full accrual basis of accounting required by U.S. GAAP;  Adjustments to record accrued interest on long-term debt. Current Status With the exception of the adjustment to accrue revenue on cost-reimbursement grants to match qualifying expenditures, corrective action was taken for this finding. See finding 2021-001 in the accompanying schedule of findings and questioned costs for additional information about the grant reconciliation process. 146  CITY OF FORT WALTON BEACH, FLORIDA SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS – CONTINUED YEAR ENDED SEPTEMBER 30, 2020 FINDING 2020-003 – FRAUDULENT TRANSACTIONS Condition The City’s former Finance Director opened an American Express card in the name of the City in May 2019. Purchases on the card, which were for personal use, were made between August 2019 and February 2020. Outbound ACH transactions totaling approximately $45,000 from the City’s bank account were used to pay the credit card charges. The Finance Director was terminated after being arrested and charged with criminal misconduct in February 2020. Journal entries in the amount of $6,581 was posted in the City’s general ledger to account for the ACH payments during FY2020. The support documentation provided with the journal entry was falsified and not reflective of the actual charges made on the credit card. The journal entries and the accompanying support documentation were prepared by the City’s former Finance Director and reviewed and approved by the City’s Comptroller. The outbound ACH transactions initiated in December 2019, January 2020, and February 2020 totaling