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Financial Statements and Federal Single Audit Report City of Issaquah

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Financial Statements and Federal Single Audit Report City of Issaquah Financial Statements and Federal Single Audit Report City of Issaquah For the period January 1, 2018 through December 31, 2018 Published March 26, 2020 Report No. 1025905 Office of the Washington State Auditor Pat McCarthy March 26, 2020 Mayor and City Council City of Issaquah Issaquah, Washington Report on Financial Statements and Federal Single Audit Please find attached our report on the City of Issaquah’s financial statements and compliance with federal laws and regulations. We are issuing this report in order to provide information on the City’s financial condition. Sincerely, Pat McCarthy State Auditor Olympia, WA Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (564) 999-0950 [email protected] TABLE OF CONTENTS Schedule of Findings and Questioned Costs ................................................................................... 4 Schedule of Audit Findings and Responses .................................................................................... 6 Schedule of Federal Award Findings and Questioned Costs ........................................................ 10 Summary Schedule of Prior Audit Findings .................................................................................. 15 Independent Auditor's Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards................................................................................................... 17 Independent Auditor's Report on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance in Accordance With the Uniform Guidance ......................... 20 Independent Auditor's Report on Financial Statements ................................................................ 24 Financial Section ........................................................................................................................... 28 Corrective Action Plan for Findings Reported Under Uniform Guidance ..................................105 About the State Auditor's Office ..................................................................................................108 Office of the Washington State Auditor Page 3 SCHEDULE OF FINDINGS AND QUESTIONED COSTS City of Issaquah January 1, 2018 through December 31, 2018 SECTION I – SUMMARY OF AUDITOR’S RESULTS The results of our audit of the City of Issaquah are summarized below in accordance with Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Financial Statements We issued an unmodified opinion on the fair presentation of the financial statements of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information in accordance with accounting principles generally accepted in the United States of America (GAAP). Internal Control over Financial Reporting: Significant Deficiencies: We reported no deficiencies in the design or operation of internal control over financial reporting that we consider to be significant deficiencies. Material Weaknesses: We identified deficiencies that we consider to be material weaknesses. We noted no instances of noncompliance that were material to the financial statements of the City. Federal Awards Internal Control over Major Programs: Significant Deficiencies: We reported no deficiencies in the design or operation of internal control over major federal programs that we consider to be significant deficiencies. Material Weaknesses: We identified deficiencies that we consider to be material weaknesses. Office of the Washington State Auditor Page 4 We issued an unmodified opinion on the City’s compliance with requirements applicable to its major federal program. We reported findings that are required to be disclosed in accordance with 2 CFR 200.516(a). Identification of Major Federal Programs The following program was selected as a major program in our audit of compliance in accordance with the Uniform Guidance. CFDA No. Program or Cluster Title 20.205 Highway Planning and Construction Cluster – Highway Planning and Construction The dollar threshold used to distinguish between Type A and Type B programs, as prescribed by the Uniform Guidance, was $750,000. The City did not qualify as a low-risk auditee under the Uniform Guidance. SECTION II – FINANCIAL STATEMENT FINDINGS See finding 2018-001. SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS See finding 2018-002. Office of the Washington State Auditor Page 5 SCHEDULE OF AUDIT FINDINGS AND RESPONSES City of Issaquah January 1, 2018 through December 31, 2018 2018-001 The City’s controls over financial statement preparation were inadequate to ensure accurate financial reporting. Background City management is responsible for designing, implementing and maintaining internal controls to ensure financial statements are fairly presented and to provide reasonable assurance regarding the reliability of financial reporting. The City prepares its financial statements in accordance with generally accepted accounting principles (GAAP). These financial statements are complex, and the reporting requirements change frequently. In our previous four audits, we identified material weaknesses in controls over financial reporting that hindered the City’s ability to produce accurate financial statements. In the past four years, the City has experienced turnover in key finance and accounting positions. Several employees with key roles for managing the accounting operations left the City during the first several months of 2019 as the City was trying to close-out fiscal year 2018. As a result, the City hired an external consultant to help prepare the financial statements. Although the City has taken steps to improve its financial reporting and review process, it has been unable to correct all deficiencies given the significant changes experienced in the past four years. During the current audit, we continued to identify misstatements that we consider to be material weaknesses in controls over financial reporting. Government Auditing Standards requires the auditor to communicate material weaknesses, defined in the Applicable Laws and Regulations section below, as a finding. Description of Condition We noted the following deficiencies in internal controls over accounting and financial reporting that, when taken together, represent a material weakness: City employees responsible for reviewing the financial statements and required schedules did not have sufficient time and resources to ensure the underlying accounting records supporting the financial statements were accurate. Office of the Washington State Auditor Page 6 City procedures for performing a final review of the financial statements and required schedules were not effective or adequate to detect and correct errors before our audit. Cause of Condition The City has experienced significant turnover in the Finance department for the past several years. As a result, the City could not dedicate the necessary time and resources to ensure the financial statements were free from material misstatements. Effect of Condition Inaccurate financial reports limit access to financial information used by City officials, the public, state and federal agencies and other interested parties. They also hinder the audit process and increase audit costs. Our audit identified the following misstatements: The Charges for Services revenue balance was overstated by $11,293,827 in the Governmental Activities opinion unit because the City did not eliminate Internal Service Fund transactions. The General Government expenditure balance was overstated by $10,623,583 in the Governmental Activities opinion unit because the City did not eliminate Internal Service fund transactions. Current Receivables was understated by $ 2,339,243 in the Street Capital Fund due to an adjustment that was made in error. This also caused the revenue balance to be understated by the same amount in the Governmental Activities. Depreciation expense was overstated by $1,722,197 in the Stormwater Fund due to a prior-year entry that was made in error. The City subsequently corrected the errors listed above during our audit. We also noted additional less significant errors in the financial statements that we communicated to the City’s management during the audit. Recommendations We recommend the City continue to establish and follow effective internal controls over financial statement reporting and review. Specifically, we recommend the City conduct an effective, independent financial statement review that ensures the required financial statement package is accurate and complies with reporting standards. Office of the Washington State Auditor Page 7 City’s Response The City of Issaquah appreciates the opportunity to respond to the conclusions drawn by the staff of the Washington State Auditor’s Office (SAO). We would like to thank the audit staff for the open communication throughout the audit. The City is committed to establishing and following effective internal controls for preparing and reviewing its financial statements. The City of Issaquah continues to take steps to improve internal controls with the goal of producing accurate financial statements. While the City continued to experience staff turnover in 2018 and 2019 and challenges with its enterprise resource planning system
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