CITY OF NEWPORT, RHODE ISLAND
RECOMMENDATIONS TO MANAGEMENT
FOR THE YEAR ENDED JUNE 30, 2006

We present for your consideration our comments and recommendations relating to the internal control and other operating and administrative matters, which came to our attention during the course of our audit.

CITY

State Grants Special Revenue Fund - Fund Deficit

At June 30, 2006, the State Grants Special Revenue Fund had a deficit of $272,217. Funds that account for grant activity should generally not have deficit balances due to the fact that the municipality cannot expend more than the total grant authorization.

Recommendation:

We recommend that the City review the accounting policies and procedures that pertain to the State Grants Fund, in particular revenue recognition policies. Additionally, the City should evaluate the deficit position at year end to determine if it is a temporary issue or a permanent issue that will require additional funding from within the City.

Fixed Asset Accounting

During our audit of the non-major enterprise fund fixed assets, we noted that depreciation was being recorded on assets that were still in the construction phase. Currently, the fixed asset records appear to capitalize periodic payments on projects and begin depreciation on those costs immediately.

Recommendation:

We recommend that during the construction of a fixed asset, the capitalized costs should be recorded as Construction in Progress until the asset is fully constructed and placed in service. Depreciation on an asset represents the systematic write off of the cost of an asset during its income or service producing life. Based on this, depreciation should not be applied to assets until they are placed in service.

Posting of Deposits in the Water and Sewer Funds

During our audit of accounts receivable and revenue in the City's Water and Sewer Funds, we noted that payments received via wire transfer are not posted to cash receipts in a timely manner. Posting of payments is held off until the bank statement is received after the end of the month. In certain cases, deposits are being posted up to 30 days after the deposit hits the bank account.

Recommendation:

We recommend that the City establish procedures to minimize the time delay in recording these payments. The City should work with the bank receiving the wire transfer in order to develop a better notification system in order to verify receipt of deposit. Once verified, the receipt should be immediately recorded in the accounting systems. If errors occur in the verification, they should be found via monthly bank reconciliations and can be adjusted at that time. Establishing such procedures will provide the City with a more timely and accurate measure of cash flow in these funds.

CITY OF NEWPORT, RHODE ISLAND

RECOMMENDATIONS TO MANAGEMENT (CONTINUED)

CITY (Continued)

Capital Project Expenditure Approvals

During our audit of capital project expenditures, we noted that the Contractors Application for Payment invoices are not consistently signed off by the project architect.

Recommendation:

We recommend the City amend its current policy of approval for payment on capital project invoices to include the requirement of the approval of the project architect when applicable. The approval provides third party oversight on all payment requests helping to insure contractors are not requesting payment for services not yet provided.

Community Development Loans Receivable

During our audit of the Community Development Fund we noted that the loans receivable are made up of a significant number of non performing loans. As a result, assets designed to provide for economic development within the City are not available for use.

Recommendation:

The City should continue to aggressively attempt to collect non performing loans outstanding. Additionally, the City should develop collection policies regarding new loans made by the fund in order to avoid future loans from becoming non performing assets of the fund.

SCHOOL DEPARTMENT

Student Activity Accounts - Timeliness of Deposits

During our audit of the Student Activity Fund accounts, we noted that in certain instances deposits were not made in a timely manner.

Recommendation:

We recommend that all deposits received by the activity fund custodian be deposited within one business day of receipt.

Student Activity Accounts - Expenditure Documentation

During our audit of the student activity fund accounts, we noted the following instances:

• Expenditures were not supported by original vendor invoices or valid substantive evidence of the purpose of the expenditure.
• Paid invoices lacked indication of approval for payment.

  Recommendation:

  We recommend that only original vendor invoices that are approved by the appropriate school department staff be processed for payment.

  CITY OF NEWPORT, RHODE ISLAND

  RECOMMENDATIONS TO MANAGEMENT (CONTINUED)

  SCHOOL DEPARTMENT (Continued)

  Student Activity Accounts - Deposits Documentation

  During our audit of the student activity fund accounts, we noted that in certain instances deposits were not supported with detail documentation of the nature and amount of the deposits.

  Recommendation:

  We recommend that all deposits received by the activity fund custodian be accompanied by a standardized deposit summary that contains the nature and detail of the deposit including total value of checks and cash contained in the deposit.

  School Lunch Program Deficit

  At June 30, 2006 the School Lunch Program had a deficit of $360,490. During the year the programs deficit was reduced by approximately $45,000.

  Recommendation:

  We recommend the School Department continue to monitor the program to avoid future annual operating deficits. Also, we recommend the School Department establish and enact a plan to fund the deficit position in the program.