Sunday, April 13, 2014

The Financial State of Belle Isle - Part II

To keep it a readable length, the previous Belle Isle Sun article entitled "The Financial State of Belle Isle" did not deeply explore some of the most important aspects of Belle Isle's 2013 Comprehensive Annual Financial Report (CAFR). This article is intended to provide readers with supplemental information about these important aspects of the 2013 CAFR (linked at the end of this article).

Scope and Limitations of the CAFR

When considering the information presented in the 2013 CAFR, it is important to understand what is, and what isn't, required in performing this type of financial review. Page iii of the introduction to the 2013 CAFR describes the review procedure as follows:

"The City of Belle Isle's financial statements have been audited by McDirmit Davis & Company LLC, a firm of licensed certified public accountants. The goal of the independent audit was to provide reasonable assurance that the financial statements of the City of Belle Isle for the fiscal year ended September 30, 2013, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation."

Basically, the role of McDirmit Davis is to examine our City's financial statements, general accounting principles, and estimates made by our City's management on in order to "provide reasonable assurance" that they are "free of material misstatement." However, page 60 of the 2013 CAFR also cautions that:

"The City of Belle Isle, Florida does not have controls over preparation of the financial statements which would prevent or detect a misstatement in the financial statements."

Putting the two above statements together, it becomes clear that this process primarily relies upon a review of our City's financial statements. Financial statements which cannot be verified because of the City's lack of controls which would prevent or detect a misstatement. Financial statements which our City Manager states it has not been "practical or possible for our City to create." (2013 CAFR, p. 65).

After the April 1 meeting, Commissioner Nielsen requested that the auditor clarify the scope of the financial review performed for the yearly CAFR. The auditor confirmed that they do not perform the type of audit where each incoming check and outgoing payment is reviewed to verify the financial state of the City. Instead, the auditor simply confirms information by reviewing our City's financial statements and questioning multiple City employees. If the employees give corroborating responses, the provided information will not be investigated further unless otherwise required.

Upon questioning after the meeting, the auditor confirmed that our City would have to seek a deeper audit if we sought to truly verify our City's present financial position.

Finance Manager Experience & Training

In the previous "Financial State" article, it was noted that our present City Manager and Finance Manager do not have the experience or training to create the financial statements that would remove the above-described "significant deficiency" from Belle Isle's yearly CAFR. This is not a personal evaluation of our City employees' abilities, but instead comes from statements made by our City Manager and our City's auditing firm, McDirmit Davis.

On page 65 of the 2013 CAFR, City Manager Keith Severns states as follows:

"Due to the size and limited resources of the City, it has not been practical or possible for the City to prepare its own Financial Statements. Going forward, the Auditor is going to work with the Finance Manager to prepare the statements."

Although this statement is worded rather vaguely, it still clearly conveys that no one at City Hall presently has the experience or training to produce the necessary financial statements. If any City employee was capable of producing these financial statements, then Mr. Severns' statement about it not being possible for the City to prepare it's own financial statements would be false.

This issue was discussed more fully during the auditor's presentation at the April 1 meeting. With regard to our present Finance Manager's capability for producing financial statements, the auditor stated as follows:

"I believe she is [capable] and I think that going forward that's a goal that the City Manager has, that Tracy start doing more of this document and I don't have to do it all. And then you can get rid of this significant deficiency."

So while it is clearly the opinion of our City Manager and auditor that our present Finance Manager has the capability to learn to produce the necessary financial statements, it is also clear from these statements that our Finance Manager does not presently have the experience or training to be able to produce such statements. According to our City Manager's above quote, this problem will be rectified by having McDirmit Davis work with our Finance Manager on the needed financial statements. 

Belle Isle's Emergency Reserve

With regard to City Hall's repeated claim that Belle Isle has over a million dollars in in emergency reserves, the auditor stated as follows:

"If you look on page 13 [of the 2013 CAFR], you can see that even though there is slightly over a million dollars, only $543,000 of that is unassigned. When you all did the 2014 budget, $532,000 of that fund balance was assigned in the [2014] budget, meaning you're going to use it as revenue to offset your expenditures in the future years. So you really don't have a million dollars of unassigned revenue. It's only half that amount."

And that figure still does not account for the $503,145 in overdue impact fees presently owed to Orange County and described on page 64 of the 2013 CAFR. According to City Attorney Frank Kruppenbacher at the April 1 meeting, these fees are set to be paid by our City next month.

Now that these overdue impact fees are finally scheduled for payment, the upcoming expense of paying such fees must also be deducted from our City's remaining $543,000 in unassigned funds. So even giving full faith and credit to every statement contained in the 2013 CAFR, this means that our City is left with approximately $40,000 in unassigned funds available for future emergencies and unplanned City expenses.

2013 Comprehensive Annual Financial Report (CAFR)

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