Canton, Massachusetts · Saved source text
FY15 Management Letter
Saved text from 8 source pages. Transcription and OCR may contain errors; verify figures and wording against the original. Retrieved 2026-10-15.
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TOWN OF CANTON, MASSACHUSETTS
MANAGEMENT LETTER
YEAR ENDED JUNE 30, 2015Source page 2
Table of Contents Transmittal letter...……………………………………………………. ...................1 Overview .................................................................................................................. .2 Informational Items……………………………………………………………….3 - 5 Findings and Comments……………………………………………………………6
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Board of Selectmen Town of Canton Canton, Massachusetts In planning and performing our audit of the financial statements of the governmental activities, business-type activities, each major fund, and the aggregate remaining fund information of the Town of Canton, Massachusetts, (the “Town”) as of and for the year ended June 30, 2015, in accordance with auditing standards generally accepted in the United States of America, we considered the Town’s internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Town’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Town’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting 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 financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. This communication is intended solely for the information and use of management, the Board of Selectman, and others within the organization, and is not intended to be and should not be used by anyone other than these specified parties. Roselli, Clark & Associates Certified Public Accountants Woburn, Massachusetts November 4, 2015 Town of Canton, Massachusetts 1 of 6 Management Letter
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I. OVERVIEW
Fiscal year 2015 was another financially positive year for communities in Massachusetts.
Many experienced increases to their reserve balances as average balances statewide increased
to approximately 8% of general fund expenditures. In addition, unemployment rates have
been reduced to pre-recession levels and a favorable mortgage market has bolstered home
sales which have been robust over the past 2 years.
The Town ended the year with approximately $11.4 million in unassigned fund balance. This
represented a $1.6 million increase over the prior year and was the fifth straight year that the
unassigned fund balanced increased by 10% over the prior year. The increase was primarily
due to positive budgetary results of $3.4 million and a $0.7 million increase in stabilization
funds, offset by use of free cash of $2.5 million. In addition, the Town added over $0.5
million to its OPEB Trust, reflecting its commitment to begin to fund this long-term
obligation.
These results exemplified the consistency the Town maintains in managing its reserves. More
specifically, unassigned fund balances have not been below $5.1 million during any of the
past 10 years. In doing so the Town has kept a reserve ratio trending over 10% while still
being able to (1) balance its budget on an annual basis, (2) maintain significant unused levy
capacity, and (3) attend to its capital needs.
A common budgetary flexibility test used by the rating bureaus when conducting a credit
evaluation is called a reserve ratio. The ratio is calculated by adding general fund assigned
and unassigned fund balances presented in the financial statements and dividing this by the
general fund expenditures. 15% is considered tier one and 8% - 15% is considered tier two.
The Town’s ratio is 14.9% which places the Town just shy of tier one and is considered
healthy. This metric represents 10% of the overall credit profile.
Other metrics such as the Town’s demographics, proximity to Boston and first class
Management Team were critical components of the S&P evaluation and decision to rate
Canton AAA investment grade several years ago. The Town’s consistency and delivery
since, has allowed the Town to maintain this top investment grade.
The Town’s bond rating is important. Maximizing the Town’s bond rating, will minimize the
cost of future borrowing for the Town, and the Town has been successful in this endeavor.
We are encouraged by this effort and support the Town’s efforts to continue this trend into
the future. Also, on a positive note, the Town continues to improve upon its internal control
process; in part this is done through the corrective action suggested through annual
management letters.
The remainder of this report is intended to provide the Town and its management with
recommendations for improvement in accounting and financial operations and informational
items. The Town should review these recommendations and informational items, and, if
determined to be cost-effective, implement these improvements.
Town of Canton, Massachusetts 2 of 6 Management LetterSource page 5
II. INFORMATIONAL ITEMS
Statement on Auditing Standards No. 115 – Audit Communications
The American Institute of Certified Public Accountants (“AICPA”) recently issued Statement
on Auditing Standards No. 115, Communicating Internal Control Related Matters Identified in
an Audit (“SAS 115”). SAS 115 establishes standards and provides guidance on
communicating matters related to an entity’s internal control over financial reporting identified
in an audit of financial statements. In particular, SAS 115 provides guidance on evaluating the
severity of deficiencies in internal control identified in an audit of financial statements in the
following order:
1. Deficiency in internal control
2. Significant deficiency
3. Material weakness
Deficiencies identified as significant deficiencies or material weaknesses are required to be
communicated to those charged with governance. Deficiencies in internal control are not
required to be communicated; however we have chosen to also report these types of
deficiencies in this report.
We did not deem any of the findings in this report to be categorized as either a significant
deficiency or a material weakness.
Municipal Data Breaches
We alerted the Town in the prior year management letter to be aware of network security.
This information item is being reported again as a reminder to remain vigilant as in the past
year Massachusetts has seen significant increases in breaches in local networks and related
thefts.
The Town has taken a proactive approach to IT security and we recommend that the Town
continue to place an emphasis on IT security and continually update its IT security procedures.
An important area of emphasis is training employees in security procedures as often they are
targeted by outsiders attempting to gain access to the Town’s system’s and sensitive data
through email, telephone, social media, etc.
Effect of Adoption of New Accounting Principle - Pensions
In fiscal year 2015, the Town and virtually all municipalities in the Commonwealth adopted
new pension accounting standards. The new pension accounting standards required, for the
first time, that the Town present its portion of the unfunded pension liability owed to its
current and former employees in the government-wide financial statements. At June 30, 2015,
the net pension liability for the Town is approximately $39.2 million.
It is important to note that the new pension accounting standards do not affect the underlying
regional pension system or its funding schedule. All Massachusetts pension systems are
required by Massachusetts general law to be fully funded by June 30, 2040. The Norfolk
County Retirement System, which is the pension system the Town participates in, is currently
60% funded based on a December 31, 2014 actuarial study and actual pension plan net assets
as of that date.
Town of Canton, Massachusetts 3 of 6 Management LetterSource page 6
The new pension accounting standards will require that the Town to become a more active
participant in the audit of the Norfolk County Retirement System. The Town can expect to
have its retiree and employee census data tested on a rotational basis. It is therefore important
that the Town promptly provide the requested documentation to the Norfolk County
Retirement System and its auditors in a timely manner so as to not delay the annual process of
it and all other employer units of the retirement system.
New Accounting Principle - OPEB
The Governmental Accounting Standards Board, or GASB, has issued a new pronouncement
related to other postemployment benefits, or OPEB, that is substantially similar to the pension
standard described above. OPEB typically includes health and life insurance plans and other
similar benefits provided to Town retirees exclusive of pension benefits.
Currently, the Town reports a net OPEB obligation in its government-wide financial
statements. However, the proposed new accounting standards will require that the net OPEB
liability, which can be substantially larger that the net OPEB obligation, be reported in the
government-wide financial statements. Adoption of this new accounting standard is two years
away for the Town.
While this proposed accounting standard will likely materially affect the Town’s government-
wide financial statements, the Commonwealth has not passed legislation requiring
municipalities to begin setting aside monies for this unfunded obligation like it has with
pensions.
The Town established an OPEB trust fund and has accumulated nearly $1.2 million in assets
to provide for this liability. Credit rating agencies like Standard and Poor’s Financial Services
LLC, or S&P, have begun to assign an allocation of the credit evaluation to the management of
long-term liabilities, which includes OPEB. We recommend that the Town continue its
commitment to funding this liability to assist in maintaining the Town’s exemplary bond
rating.
Changes to Single Audit Requirements
The Office of Management and Budget, or OMB, raised the threshold for OMB A-133
compliance audits (i.e., single audits) from $500,000 to $750,000. This new threshold is
expected to apply to the Town in fiscal year 2016. However, the Town’s federal grant awards
exceed the new $750,000 threshold so it should continue to require a single audit.
Also included in the new audit requirements is a requirement that the Town’s internal control
structure should be in compliance with recognized internal control framework such as the
Green Book or COSO. At first pass, this requirement doesn’t seem overly complicated.
However, past experience has shown that seemingly harmless requirements similar to these
can cause an entity to expend significant time and monetary resources in order to comply.
Take for instance the Sarbanes-Oxley Act in 2002, which required that a public company’s
management assess and attest to its internal control system. Public companies of a similar size
to the Town expended hundreds of hours of resources and tens of thousands of dollars to
comply with this law and created a cottage industry for accountants and consultants.
Adopting a formal internal control framework is new to municipalities and will likely require a
good deal of evaluation, documentation, remediation and ongoing monitoring. We
Town of Canton, Massachusetts 4 of 6 Management LetterSource page 7
recom m end that the Town com m ence this process by taking a com m on sense approach and
tackle the areas in w hich the Town ism ost susceptible to an intemal controldeficiency. 0 ver
a period of tim e, the Town should com plete the fom al adoption of an intemal control
fram ew ork.
The follow ing 17 principles of effective intemal controlw ere extracted from the publication
by the C om m ittee of Sponsoring O rganizations of the T readw ay Comm ission,orCOSO,
Internal Control — Integrated Framework. The entire intemal contol fram ew ork and
im plem entation guides can be found online.
Internal Control Component
Control environment 1. Demonstrate commitment to integrity and
ethical values
Ensure that board exercises oversight
responsibility
. Establish structures, reporting lines, authorities
and responsibilities
. Demonstrate commitment to a competent
workforce
. Hold people accountable
Risk assessment . Specify appropriate objectives
. Identify and analyze risks
. Evaluate fraud risks
. Identify and analyze changes that could
significantly affect internal controls
Control activities . Select and develop control activities that
mitigate risks
. Select and develop technology controls
Deploy control activities through policies and
procedures
Information and communication . Use relevant, quality information to support the
intemal control function
. Communicate internal control information
intemally
. Communicate internal control information
externally
Monitoring . Perform ongoing or periodic evaluations of
intemal controls (or a combination of the two)
. Communicate internal control deficiencies
Town of Canton, Massachusetts 5 of 6 Management Letter
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recommend that the Town commence this process by taking a common sense approach and
tackle the areas in which the Town is most susceptible to an internal control deficiency. Over
a period of time, the Town should complete the formal adoption of an internal control
framework.
The following 17 principles of effective internal control were extracted from the publication
by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO,
Internal Control – Integrated Framework. The entire internal control framework and
implementation guides can be found online.
Town of Canton, Massachusetts 5 of 6 Management LetterSource page 8
III. FINDINGS AND RECOMMENDATIONS
Employee Reimbursement Policy (repeated from prior year)
In response to prior auditor comments regarding a policy for employee reimbursements, the
Town drafted a policy for such activity. We understand that this policy has yet to be adopted
and suggest the Town follow-through with these final steps to help remove any risk
associated with this activity.
Planning Board Escrow Deposits (repeated from prior year)
Prior year audits have highlighted several issues with respect to the Planning Board
Accounts. These include payment of services when funds are not available and maintaining
deficit account balances which are the results of a lack of monitoring developers’ available
balances. While progress is ongoing we noted the same conditions existed during fiscal year
2015.
Pre-School and Kindergarten Revolving Funds
The School Department operates a tuition based pre-school and full-day kindergarten
program for which it collects annual tuitions of over $150,000 and $400,000, respectively.
Overall, the School Business Office has developed internal controls that are sufficient to
account for and safeguard these revenues. We did note that during the year there is a lack of
communication regarding participants that move out of the program. The program directors
should notify the Business Office immediately when a student is removed from the program.
Furthermore, each program director should provide a roster of participants on a quarterly
basis so that the Business Office can ensure that all participants are properly accounted for.
We also noted that the Business Office waits until after year-end to reconcile the tuition
payment records to the Town’s MUNIS general ledger. This reconciliation should occur
periodically during the fiscal year to resolve any revenue mispostings in a timely manner.
Building Department
Revenues for the Building Department are largely from the issuances of building, electrical,
plumbing and gas permits, which were approximately $1,100,000 for fiscal year 2015. Due
to the large volume of receipts that are processed through the Department it is imperative that
strong internal controls are in place and enforced. We sampled ten permits issued by the
Department during the year and found that the required forms were completed and filed, the
appropriate fee was calculated and charged, and the payments were deposited timely and
agreed to the posting in the general ledger. We did note that the Department does not verify
that the funds turned over agree to what is posted in MUNIS. We recommend that the
Department reconcile the amounts turned over to the monthly revenue reports distributed by
the Town Accountant. To facilitate this reconciliation, the Town Accountant may need to
provide a detail of the monthly activity in addition to the monthly summary reporting.
Town of Canton, Massachusetts 6 of 6 Management Letter