Report On Internal Control and On Compliance and Other Matters City of Philadelphia Fiscal Year 2018


Annual, Financial Rebecca Rhynhart FY18 Internal Controls

Executive Summary


Why The Controller’s Office Conducted the Audit

In accordance with the Philadelphia Home Rule Charter, the Office of the City Controller audited the City of Philadelphia’s (city) basic financial statements as of and for the fiscal year ended June 30, 2018, issued as part of the city’s Comprehensive Annual Financial Report (CAFR). To help plan and perform the audit, which occurs annually, the Controller’s Office reviews the city’s internal control over financial reporting and examines the city’s compliance with certain provisions of laws, regulations, contracts, and grant agreements to identify any noncompliance that could have a direct and material effect on financial statement amounts.

The Controller’s Office reports upon any identified significant deficiencies and material weaknesses in the city’s internal controls. Significant deficiencies are less severe than material weaknesses, yet important enough to merit attention by those charged with governance. Material weaknesses identified in financial reporting result in a reasonable possibility that a material misstatement of the city’s financial statements may not be prevented or detected and corrected on a timely basis. If a material misstatement on the city’s financial statements occurred, the statements would be an ineffective tool for assessing the city’s financial health.

FY18 Report Findings

While the Controller’s Office found that the city’s financial statements were presented fairly, in all material respects, our review identified two material weaknesses and seven significant deficiencies in the city’s internal controls over financial reporting. Two of the findings are new, whereas the remaining findings have been unremedied or only partially addressed for years. Only one of the 10 material weakness and significant deficiency findings from fiscal year 2017’s report were fully resolved within fiscal year 2018.

The fiscal year 2018 report on internal control and on compliance and other matters discusses the material weaknesses and significant deficiencies in depth. Key findings include:

  • Material Weakness: Inadequate staffing levels, lack of technological investment, and insufficient oversight have led to undetected material misstatements. Our audit disclosed a number of conditions, which collectively are a material weakness, that impede the ability of the Finance Office accountants to prepare a timely, accurate, and completed CAFR without significant adjustments recommended by the City Controller’s audit staff. The Controller’s Office identified accounting errors totaling $236 million not detected by Finance Office accountants during preparation of the fiscal year 2018 CAFR. Significantly, the untimely and inadequate review of Aviation Fund financial statements by Division of Aviation and Finance Office accountants resulted in $122.4 million in material misstatements in the Fund’s financial statements. These errors are part of the $236 million in errors. A 28 percent decrease in staff since fiscal year 2000, including a decrease of one full-time employee from fiscal year 2017 totals, and the lack of a comprehensive financial reporting system for preparing the CAFR, have compromised the ability of Finance management to perform adequate reviews of the city’s financial statements. The Controller’s Office proposed adjustments to correct the $236 million in errors, and the Finance Office booked most, but not all, of the adjustments. Additionally, the continued late receipt of component unit financial reports delayed the preparation and audit of the CAFR and increased the risk of errors.
  • Material Weakness: Untimely and inaccurate preparation of the Schedule of Expenditures of Federal Awards (SEFA) resulted in the late submission of the single audit reporting package to the Federal Audit Clearinghouse. The Finance Office’s Grants Accounting and Administrative Unit (GAAU), which is responsible for preparing the SEFA, did not prepare and provide for audit a preliminary SEFA for the fiscal year ending June 30, 2018 until March 18, 2019, which was 13 days before the single audit submission deadline of March 31, 2019. In addition to the late receipt of the SEFA, the Controller’s Office found that the preliminary SEFA that was submitted on March 18th was inaccurate. Inaccuracies in the SEFA have been reported by the Controller’s Office for several years. The preliminary SEFA also lacked subrecipient information, making it impossible for the Controller’s Office to follow up on another prior year finding regarding inaccurate subrecipient expenditure amounts reported on the SEFA.    
  • Significant Deficiency: While improved, remaining deficiencies in Treasurer’s bank reconciliation procedures still create potential for undetected errors and irregularities.  Last year’s finding regarding deficiencies in the Treasurer’s bank reconciliation procedures showed that these deficiencies resulted in a $33.3 million variance (as of June 30, 2017) between the city’s consolidated cash account book and bank balance. The Treasurer’s Office took steps to address the shortcomings over the last year, including fiscal year 2018 bank reconciliations for the consolidated cash account being prepared and reviewed in a timely manner. However, reconciliation issues continue, including the remainder of the unreconciled variance, $529,000, not being identified and an additional $13.5 million in bank receipts remaining unmatched. Additionally, reconciliation procedures have not been formalized, variances remain in the revenue activity in the Department of Public Health, and prior year activity for certain long unreconciled accounts were not properly reviewed. In regard to failing to review prior year activity for certain accounts, the Treasurer’s Office stated reconciliations could not be completed because supporting documentation was not available, whether from the city records or from the bank. Without documented evidence that the activity was reviewed, there remains a risk that errors and/or irregularities went undetected.

What The Controller’s Office Recommends

The Controller’s Office has developed a number of recommendations to address the findings in this report. Some of the more significant recommendations to the above findings are noted below.

To improve controls over the preparation and review of the city’s CAFR, the Finance Office should follow through with its plan to use an accounting firm to assist with the preparation of the CAFR as a short-term solution to the finding. However, Finance Office management should either hire more accountants, or invest in a new financial reporting system that will reduce the labor-intensive procedures needed to prepare the city’s CAFR as a long-term resolution.

To improve the timeliness of the SEFA, the Finance Office’s GAAU should allocate adequate resources to ensure the timely preparation and submission of the SEFA for audit purposes. GAAU should also proactively enforce the existing policies and procedures requiring departments to complete expenditure reconciliations by the due date.

To further improve the reconciliation process for the consolidated cash account, the Treasurer’s Office should formalize the reconciliation procedures in writing, as well as continue investigating the remaining unknown variance, including setting a timeline for completing the investigation. For the four long unreconciled checking accounts, we recommend that Treasurer management request the assistance of the bank and Finance Office management to retrieve the bank and city supporting records needed to complete the reconciliations.

Additional recommendations developed by the Controller’s Office can be found in the body of this report.