HomeMy WebLinkAbout2012 Management LetterCITY OF EVANSTON, ILLINOIS
COMMUNICATION TO THOSE CHARGED WITH GOVERNANCE
AND MANAGEMENT
As of and for the Year Ended December 31, 2012
CITY OF EVANSTON, ILLINOIS
TABLE OF CONTENTS
Paae No.
Required Communication of Internal Control Related Matters Identified in the
Audit to Those Charged with Governance
Material Weakness 2
Significant Deficiencies
Other Communications with Those Charged with Governance
Two Way Communication Regarding Your Audit 4
Communication of Recommendations and Informational Points
to Management that are not Material Weaknesses or Significant Deficiencies
Recommendation 6
Informational Points 7
Required Communications by the Auditor with Those Charged with Governance 13
Summary of Uncorrected Financial Statement Misstatements
Management Representations
REQUIRED COMMUNICATION OF INTERNAL CONTROL RELATED MATTERS IDENTIFIED IN THE
AUDIT TO THOSE CHARGED WITH GOVERNANCE
BAKER T I L LY
Baker Tilly Virchow Krause, LLP
1301 W 22nd St, Ste 400
Oak Brook, IL 60523-3389
,el 630 990 3131
fax 630 990 0039
baker ti l ly.com
To the Honorable Elizabeth B. Tisdahl, Mayor and
Members of the City Council
City of Evanston, Illinois
In planning and performing our audit of the financial statements of the City of Evanston as of and for the year
ended December 31, 2012, in accordance with auditing standards generally accepted in the United States of
America, we considered its internal control over financial reporting (internal control) as a basis for designing our
auditing procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the
financial statements, but not for the purpose of expressing an opinion on the effectiveness of its internal control.
Accordingly, we do not express an opinion on the effectiveness of its internal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph and was
not designed to identify all deficiencies in internal control that might be material weaknesses or significant
deficiencies and, therefore, material weaknesses or significant deficiencies may exist that were not identified.
However, as discussed below, we identified a deficiency in internal control that we consider to be a material
weakness and other deficiencies that we consider to be significant deficiencies.
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 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. We consider the following
deficiency in the City's internal control to be a material weakness:
> Journal Entries
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe
than a material weakness, yet important enough to merit attention by those charged with governance. We
consider the following deficiencies in the City's internal control to be significant deficiencies:
> Information Technology
> Cash Receipts Controls
The City of Evanston's written responses to the material weakness and significant deficiencies identified in our
audit have not been subjected to the auditing procedures applied in the audit of the financial statements and,
accordingly, we express no opinion on them.
This communication is intended solely for the information and use of management, those charged with
governance, and others within the organization and is not intended to be, and should not be, used by anyone
other than these specified parties.
v LLP
Oak Brook, IL /
June 28, 2013
� Page 1
BAKER TILLY
INTERNATIONAL
MATERIAL WEAKNESS
JOURNAL ENTRIES
The ability to prepare and initiate journal entries is delegated to various levels of finance employees.
These entries do not post to the system until the Accounting Manager reviews and approves them.
However, there is no review and approval of journal entries initiated and recorded by the Accounting
Manager. An entry could be made or improperly supported without the City's knowledge.
CITY RESPONSE:
The City believes there are adequate controls in place for journal entry management. It is not
common for organizations to have three steps in journal entry review and is much more accepted
to have entries done by one staff member and reviewed by the manager. To add another level of
management review would be overly redundant and not cost efficient.
Page 2
SIGNIFICANT DEFICIENCIES
INFORMATION TECHNOLOGY
As part of the audit, we were required to identify the processes in place that provide a controlled
information technology (IT) environment for the applications, supporting systems and infrastructure
determined to be critical to the financial statement audit. We documented the processes in place for each
of the three main areas of focus: change management, logical access and IT operations. We then
assessed the design effectiveness of each of these processes and noted the following opportunities to
strengthen the City's IT controls.
The City has some logical restrictions in place, such as requiring a unique user ID and password to
access the systems. Through our discussions with the City and related observations, we noted that the
Network password login from the active directory requires eight characters and is changed every 90 days;
password complexity is required and the system remembers the last five passwords. Some of the City's
software systems such as AQUAS and PAL also follow these password criteria. Other of the City's
software systems such as CryWolf, ME and RecTrac require passwords; however they are not in line
with recommended password complexity standards. Best practices indicate that other steps could be
taken to further ensure the integrity of the data. All passwords should be changed periodically. They
should also meet the industry standards for length, expiration, characters, and history (passwords cannot
be repeated). However, we understand that purchased software cannot always be modified in order to
strengthen password complexity requirements.
CITY RESPONSE — Provided by Information Technology (IT):
The referenced systems — CryWolf, JDE and RecTrac are purchased packages and the City
cannot change the password handling in these systems. The City has purchased and is in the
process of installing a new system from New World Inc. in FY2013. The City will address user ID
and password related issues during the implementation of a new system. The City prevents any
issues with the utilization of the old software systems by requiring a system software password
for the use of any City system. In effect, a user must enter a password that meets or exceeds the
above referenced definitions (character length, complexity and history).
CASH RECEIPTS CONTROLS
In an optimal internal control environment, certain control processes and segregation of duties would exist
in order to prevent a misstatement of financial information. This is accomplished when no single person
can initiate, record, and control distribution of a single transaction or series of transactions. In some
instances, the personnel constraints of many organizations do not always allow for ideal segregation of
duties. However, it is our responsibility as auditors to communicate this deficiency.
During the course of our audit, we noted that the Operations Coordinator in the Collector's Office is
responsible for reconciling daily cash receipts collected by the cashiers, preparing the deposit for pickup
by Garda, and posting receipts to the City's accounting system. This presents a risk of the
misappropriation of cash receipts to be concealed within the accounting system. We recommend that a
second individual review the amount prepared for deposit in comparison to the original cash register
reports and amounts posted to the general ledger for accuracy.
CITY RESPONSE:
Since 2011, Accounting Division has been posting batches prepared by Operations Coordinator
Page 3
OTHER COMMUNICATIONS WITH THOSE CHARGED WITH GOVERNANCE
TWO WAY COMMUNICATION REGARDING YOUR AUDIT
(SAS) NO. 114 The Auditor's Communication With Those Charged with Governance
As part of our audit of your financial statements, we are providing communications to you throughout the
audit process. Auditing requirements provide for two-way communication and are important in assisting
the auditor and you with more information relevant to the audit.
As this past audit is concluded, we use what we have learned to begin the planning process for next
year's audit. It is important that you understand the following points about the scope and timing of our
next audit:
a. We address the significant risks of material misstatement, whether due to fraud or error, through
our detailed audit procedures.
We will obtain an understanding of the five components of internal control sufficient to assess the
risk of material misstatement of the financial statements whether due to error or fraud, and to
design the nature, timing, and extent of further audit procedures. We will obtain a sufficient
understanding by performing risk assessment procedures to evaluate the design of controls
relevant to an audit of financial statements and to determine whether they have been
implemented. We will use such knowledge to:
> Identify types of potential misstatements.
> Consider factors that affect the risks of material misstatement.
> Design tests of controls, when applicable, and substantive procedures.
We will not express an opinion on the effectiveness of internal control over financial reporting or
compliance with laws, regulations, and provisions of contracts or grant programs. For audits done
in accordance with Government Auditing Standards, our report will include a paragraph that
states that the purpose of the report is solely to describe (a) the scope of testing of internal
control over financial reporting and compliance and the result of that testing and not to provide an
opinion on the effectiveness of internal control over financial reporting or on compliance, (b) the
scope of testing internal control over compliance for major programs and major program
compliance and the result of that testing and to provide an opinion on compliance but not to
provide an opinion on the effectiveness of internal control over compliance and, (c) that the report
is an integral part of an audit performed in accordance with Government Auditing Standards in
considering internal control over financial reporting and compliance. The paragraph will also state
that the report is not suitable for any other purpose.
c. The concept of materiality recognizes that some matters, either individually or in the aggregate,
are important for fair presentation of financial statements in conformity with generally accepted
accounting principles while other matters are not important. In performing the audit, we are
concerned with matters that, either individually or in the aggregate, could be material to the
financial statements. Our responsibility is to plan and perform the audit to obtain reasonable
assurance that material misstatements, whether caused by errors or fraud, are detected.
We are very interested in your views regarding certain matters. Those matters are listed here:
a. We typically will communicate with your top level of management unless you tell us otherwise.
b. We understand that the City Council has the responsibility to oversee the strategic direction of
your organization, as well as the overall accountability of the entity. Management has the
responsibility for achieving the objectives of the entity.
c. We need to know your views about your organization's objectives and strategies, and the related
business risks that may result in material misstatements.
d. Which matters do you consider warrant particular attention during the audit, and are there any
areas where you request additional procedures to be undertaken?
e. Have you had any significant communications with regulators or grantor agencies?
Page 4
TWO WAY COMMUNICATION REGARDING YOUR AUDIT (cont.)
f. Are there other matters that you believe are relevant to the audit of the financial statements or the
federal awards?
Also, is there anything that we need to know about the attitudes, awareness, and actions of the City
concerning:
a. The City's internal control and its importance in the entity, including how those charged with
governance oversee the effectiveness of internal control?
b. The detection or the possibility of fraud?
We also need to know if you have taken actions in response to developments in financial reporting, laws,
accounting standards, governance practices, or other related matters, or in response to previous
communications with us.
With regard to the timing of our audit, here is some general information. If necessary, we may do
preliminary financial audit work during the month of December or January. Our final financial fieldwork is
scheduled during the spring to best coincide with your readiness and report deadlines. After fieldwork, we
wrap up our financial audit procedures at our office and may issue drafts of our report for your review.
Final copies of our report and other communications are issued after approval by your staff. This is
typically 6-12 weeks after final fieldwork, but may vary depending on a number of factors.
Keep in mind that while this communication may assist us with planning the scope and timing of the audit,
it does not change the auditor's sole responsibility to determine the overall audit strategy and the audit
plan, including the nature, timing, and extent of procedures necessary to obtain sufficient appropriate
audit evidence.
We realize that you may have questions on what this all means, or wish to provide other feedback. We
welcome the opportunity to hear from you.
Page 5
COMMUNICATION OF RECOMMENDATIONS AND INFORMATIONAL POINTS TO MANAGEMENT
THAT ARE NOT MATERIAL WEAKNESSES OR SIGNIFICANT DEFICIENCIES
RECOMMENDATION
DEFICIT FUND NETASSETS
At December 31, 2012, the City's Insurance Internal Activity Fund, reported deficit fund net assets of
$7,376,499. The Insurance Fund began the period with a deficit net asset balance of $6,124,771. As this
is an internal service fund, all revenues and transfers of net assets are supported by the City's other
funds including the General Fund, Water Fund, and Sewer Fund. These funds are expected to subsidize
the Insurance Internal Service Fund's improvement in future years.
CITY RESPONSE:
The City agrees with the above deficit fund net asset numbers for the Insurance Fund. The City
started making inter -fund transfers from the other funds during the 2010-11 fiscal year to reflect
proportionate estimated insurance costs for those funds. It is worth noting that the negative fund
balance is mainly due to an accrual for short/long-term claims payable recorded for the potential
liability in the fund financial statements for the year ended December 31, 2012.
Page 6
INFORMATIONAL POINTS
UNITED STATES AUDITING STANDARDS REVISIONS
In an effort to make US generally accepted auditing standards (GARS) easier to read, understand, and
apply, the American Institute of CPAs redrafted all of the auditing sections in the Codification of
Statements on Auditing Standards. This is also known as the Clarity Project. The new standards are
intended to more clearly specify the objectives of the auditor and the requirements with which the auditor
must comply when conducting an audit in accordance with GARS.
Generally speaking, the Clarity Project was not intended to change what auditors actually do. However,
there were several areas that resulted in changes to audit procedures. The following outlines some of the
changes / areas of emphasis:
- Consideration of Laws and Regulations — The clarified standards require auditors to perform
procedures to identify instances of noncompliance with those laws and regulations that may have
a material effect on the financial statements, including the inspection of correspondence with
relevant licensing or regulatory authorities.
- Communicating Internal Control Related Matters — The clarified standards require auditors to
include an explanation of the potential effects of significant deficiencies and material weaknesses
identified and communicated to those charged with governance.
Group Audits — AU-C section 600 (Group Audits) is significantly broader in scope than the
previous standard, which focused primarily on the involvement of "other" auditors. It establishes
new terms such as "group" and "component". A group includes all the components whose
financial information is included in the group financial statements. A component is an entity or
business activity that is required to be included in the group financial statements. Examples
include: component units, departments with separate financial reporting systems, and joint
ventures with an equity interest. A Group Audit can apply whether or not auditors are from
different firms, different offices, or teams within the same firm; or even if it is the same team
performing the audits of the group and all components.
- A significant change under AU-C section 600 is in the area of subsequent events identification.
The group auditor must perform procedures to identify subsequent events between the date of
the component auditor's report and the date of the group auditor's report, which often can cover a
significant time period. Such procedures may involve group management and the various
components, including:
> Obtaining an understanding of any procedures that group management has established to ensure
that subsequent events are identified
> Reading available interim financial information of the component and making inquiries of group
management
> Inquiring of group management regarding currently known facts, decisions, or conditions that are
expected to have a significant effect on the financial position of the group, or results of operations
for items that represent subsequent events
- Auditors' Reports — The Auditors' Report will now include the use of headings, expanded
discussions of management's responsibility for the financial reporting process, and the
introduction of two new terms: emphasis -of -matter and other -matter paragraphs.
These changes became effective for the year ending December 31, 2012 and subsequent years.
Page 7
INFORMATIONAL POINTS (cont.)
GASB STATEMENT NO. 61: THE FINANCIAL REPORTING ENTITY: OMNIBUS
The Governmental Accounting Standards Board (GASB) has issued Statement No. 61, which changed
governmental financial reporting for component units. These changes will affect your financial statements
for the year ending December 31, 2013, primarily the government -wide financial statements, and possibly
the fund financial statements.
Statement No. 61 modifies certain requirements for inclusion of component units in the financial reporting
entity. For organizations in which the primary government did not appoint a majority of the organization's
board, but were required to be included as component units by meeting the fiscal dependency criterion, a
financial benefit or burden relationship now would need to be present between the primary government
and that organization for it to be included in the reporting entity as a component unit. Further, for
organizations that do not meet the financial accountability criteria for inclusion as component units; but
that, nevertheless, should be included because the primary government's management determines that it
would be misleading to exclude them, this Statement clarifies the criteria to be considered in determining
whether the organization is to be reported as a blended or discretely presented component unit, as
discussed below.
Statement No. 61 amends the criteria for reporting component units as if they are part of the primary
government (that is, blending) or separately (that is, discretely) presented. Component units should now
be reported as part of the primary government (blended) if they meet any of the following circumstances:
> The governing bodies of both entities are substantially the same and there is a financial benefit or
burden relationship, or management of the primary government has operational responsibility for
the component unit
> The component unit provides services entirely, or almost entirely, to or that benefit the primary
government
> The component unit's total debt outstanding is expected to be repaid entirely, or almost entirely,
with resources of the primary government
The blending provisions are also amended to clarify that funds of a blended component unit have the
same financial reporting requirements as a fund of the primary government. This means that if the
component unit has multiple fund types within its report, these funds should be reported within the same
fund types of the primary government; except for the component unit's general fund, which should be
reported as a special revenue fund. Finally, additional reporting guidance is provided for blending a
component unit if the primary government is a business -type activity that uses a single column
presentation for financial reporting. Component units should be consolidated into the single column
presentation with condensed combining information presented in the notes to the financial statements.
This Statement also clarifies the reporting of equity interests in legally separate organizations. It requires
a primary government to report its equity interest in a component unit.
We are available to discuss these changes and the impact on your financial statements.
Page 8
INFORMATIONAL POINTS (cont.)
GASB STATEMENT NO. 65: ITEMS PREVIOUSLY REPORTED AS ASSETS AND LIABILITIES
Government Accounting Standards Board (GASB) Statement No. 65 — Items Previously Reported as
Assets and Liabilities will result in a reclassification of some financial statement line items on the
Statement of Net Position and Balance Sheet of governments. The new financial statement categories of
deferred outflows of resources and deferred inflows of resources will become more commonly used upon
implementation of this standard. In addition to reclassifications to these new categories, the standard will
also result in a change in the accounting treatment for certain items, including debt issuance costs. This
standard is effective for periods beginning after December 15, 2012, and was intended to complement
Statement No. 63 — Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of
Resources, and Net Position.
Some of the most significant changes of this standard that will impact many governments include:
> Debt issuance costs previously amortized will now be expensed in the period incurred
> Losses on refunding of debt will now be classified as a deferred outflow of resources, and
consistent with the change noted previously, the formula for calculating the loss has been
adjusted to exclude debt issuance costs (prospectively)
> Regulatory credits recorded by utilities will now be recorded either as a liability or a deferred
inflow of resources, depending on how the credit will be applied in the future
> The terminology of deferred revenue is no longer permitted to be used. In addition, the items
previously recorded as deferred revenue will need to be analyzed to determine if they now will be
presented as a deferred inflow of resources or a liability
> The major fund determination formula has been updated to include the new categories
We are available to discuss these changes and the impact on your financial statements.
GASB STATEMENT NO. 67: FINANCIAL REPORTING FOR PENSION PLANS
The Governmental Accounting Standards Board (GASB) has issued Statement No. 67 which will change
the financial reporting requirements for state and local government pension plans. This statement
replaces the requirements of GASB Statement Nos. 25 and 50 as they relate to pension plans that are
administered through trusts or equivalent arrangements that meet certain criteria. These changes will
affect your plan's financial statements for the year ending December 31, 2014.
This Statement applies specifically to pension plans in which a government's contributions to the trust
used to administer a pension plan are (1) irrevocable, (2) restricted to paying pension benefits, and
(3) beyond the reach of creditors.
For defined benefit pension plans, the Statement establishes standards of financial reporting for
separately issued financial reports. Distinctions are made regarding the particular requirements,
depending upon the type of pension plan administered, as follows:
> Single employer pension plan — is a plan in which pensions are provided to the employees of only
one employer
> Agent multiple employer pension plan — is a plan in which plan assets are pooled for investment
purposes, but separate accounts are maintained for each individual employer so that each
employer's share of the pooled assets is legally available to pay the benefits of only its
employees
> Cost -sharing multiple employer pension plan — is a plan in which the pension obligations to the
employees of more than one employer are pooled and plan assets can be used to pay the
benefits of the employees of any employer that provides pensions through the pension plan
Page 9
INFORMATIONAL POINTS (cont.)
The new standards generally carry forward the existing framework of financial reporting for defined
benefit pension plans, which includes a statement of fiduciary net position (the amount held in trust for
paying retirement benefits), and a statement of changes in fiduciary net position. This Statement details
the disclosure requirements for the notes to the financial statements, as well as identifies certain required
supplementary information for the ten most recent fiscal years that should be included in the plan's
financial statements.
The Statement specifies the required approach to measuring the pension liability of employers and
non -employer contributing entities for benefits provided through the pension plan (the net pension
liability), and contains requirements related to the actuarial cost method and certain other assumptions
used in the preparation of an actuarial valuation. The Statement also establishes guidance related to the
frequency of completing an actuarial valuation.
For defined contribution pension plans, the new standards generally do not change the existing reporting
requirements.
We are available to further discuss these changes and the impact on your financial statements.
GASB STATEMENT NO. 68: ACCOUNTING AND FINANCIAL REPORTING FOR PENSIONS
The Governmental Accounting Standards Board (GASB) has issued Statement No. 68, which will change
the accounting and financial reporting requirements for state and local governments that provide their
employees with pensions. This Statement replaces the requirements of GASB Statement Nos. 27 and 50
as they relate to pensions that are provided through pension plans administered as trusts, or equivalent
arrangements that meet certain criteria. These changes will affect your financial statements for the year
ended December 31, 2015.
This Statement applies specifically to governments that provide their employees with pensions through
pension plans in which a government's contributions to the trust used to administer a pension plan are
(1) irrevocable, (2) restricted to paying pension benefits, and (3) beyond the reach of creditors.
Government employers that provide their employees with a defined benefit pension are classified in one
of the following categories for this Statement:
> Single employer — is an employer whose employees are provided with a defined benefit pension
through a single employer pension plan
> Agent employer — is an employer whose employees are provided with a defined benefit pension
through an agent multiple employer pension plan
> Cost -sharing employer — is an employer whose employees are provided with a defined benefit
pension through a cost -sharing multiple employer pension plan
Under the new standards, in financial statements prepared using the economic resources measurement
focus (accrual basis of accounting), the single or agent employer is required to recognize a liability equal
to the net pension liability. The net pension liability is defined as the present value of projected benefit
payments to be provided through the pension plan, to current and inactive employees, that is attributed to
those employees' past periods of service (total pension liability), less the amount of the pension plan's net
position.
The new Statement contains requirements related to the actuarial cost method and certain other
assumptions used in the preparation of an actuarial valuation. The Statement also requires that an
actuarial valuation of the total pension liability be performed at least every two years, with more frequent
valuations encouraged. In addition, this Statement also requires disclosing certain information in the
notes to the financial statements, as well as presenting certain required supplementary information (RSI)
for the ten most recent fiscal years.
Page 10
INFORMATIONAL POINTS (cont.)
For government employers that provide their employees with a defined contribution pension, the new
standards generally carry forward the existing financial reporting requirements.
We are available to further discuss these changes and the impact on your financial statements.
GASB NO. 69 — GOVERNMENT COMBINATIONS AND DISPOSALS OF GOVERNMENT OPERATIONS
The Governmental Accounting Standards Board has issued GASB No. 69 which is aimed at improving
the accounting and reporting of combinations and disposals of government operations for US state and
local governments. The term government combinations include a variety of transactions referred to as
mergers, acquisitions, and transfers of operations.
The distinction between a government merger and a government acquisition is based upon whether an
exchange of significant consideration is present within the combination transaction. Government mergers
include combinations of legally separate entities without the exchange of significant consideration. This
Statement requires the use of carrying values to measure the assets and liabilities in a government
merger. Conversely, government acquisitions are transactions in which a government acquires another
entity, or its operations, in exchange for significant consideration. This Statement requires measurements
of assets acquired and liabilities assumed generally to be based upon their acquisition values. This
Statement also provides guidance for transfers of operations that do not constitute entire legally separate
entities, and in which no significant consideration is exchanged. This Statement defines the term
operations for purposes of determining the applicability of this Statement and requires the use of carrying
values to measure the assets and liabilities in a transfer of operations.
A disposal of a government's operations results in the removal of specific activities of a government. This
Statement provides accounting and financial reporting guidance for disposals of government operations
that have been transferred or sold.
This Statement requires disclosures to be made about government combinations and disposals of
government operations to enable financial statement users to evaluate the nature and financial effects of
those transactions.
The requirements of this Statement are effective for government combinations and disposals of
government operations occurring in financial reporting periods beginning after December 15, 2013, and
should be applied on a prospective basis. If you have any questions on how this might impact your audit,
we are available to discuss this with you.
YELLOW BOOK (GOVERNMENT AUDITING STANDARDS) REVISIONS
In December 2011, the Government Accountability Office (GAO) released a revision to Generally
Accepted Auditing Standards (GAGAS) which is also known as Yellow Book. This was the first revision
since July 2007. The changes became effective for years ending December 31, 2012.
One of the most significant modifications of the new standards was the change to the conceptual
framework for independence. Previously, the standards were more rules -based with identification of
certain non -audit services that were either allowed or prohibited. The new framework provides a means
for auditors to assess their independence based on the unique facts and circumstances of the work and
the client. However, certain underlying concepts of the standards remain with the revision, including the
fact that auditors cannot be part of your internal control system and cannot perform management
functions.
Other changes to the revision include updates for new auditing standards, convergence with AICPA and
international standards, and the retirement of the supplement containing select questions and answers on
independence.
Page 11
INFORMATIONAL POINTS (cont.)
If you have any questions on how the implementation of these revisions impacted your audit, we are
available to discuss those questions with you.
Page 12
REQUIRED COMMUNICATIONS BY THE AUDITOR WITH THOSE CHARGED WITH GOVERNANCE
BAKER TI LLY
Baker Tilly Virchow Krause, LLP
1301 W 22nd St, See 400
Oak Brook, IL 60523-3389
tel 630 990 3131
fax 630 990 0039
bakertilly.com
June 28, 2013
To the Honorable Elizabeth B. Tisdahl, Mayor and
Members of the City Council
City of Evanston, Illinois
Thank you for using Balker Tilly Virchow Krause, LLP as your auditor.
We have completed our audit of the financial statements of the City of Evanston, Illinois for the year
ended December 31, 2012, and have issued our report thereon dated June 28, 2013. This letter presents
communications required by our professional standards.
OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED /N THE UNITED STATES OF
AMEwA, GOVERNMENT AUDITING STANDARDS, AND OMB CIRCULAR A-133
The objective of a financial statement audit is the expression of an opinion on the financial
statements. We conducted the audit in accordance with auditing standards generally accepted in
the United States of America, Government Auditing Standards and OMB Circular A-133. These
standards require that we plan and perform our audit to obtain reasonable, rather than absolute,
assurance about whether the financial statements prepared by management with your oversight
are free of material misstatement, whether caused by error or fraud. Our audit included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit does not
relieve management or the City Council of their responsibilities.
We also considered internal control over compliance with requirements that could have a direct
and material effect on a major federal or major state program in order to determine our auditing
procedures for the purpose of expressing our opinion on compliance and to test and report on
internal control over compliance in accordance with OMB Circular A-133.
As part of obtaining reasonable assurance about whether the City's financial statements are free
of material misstatement, we performed tests of its compliance with certain provisions of laws,
regulations, contracts and grants, noncompliance with which could have a direct and material
effect on the determination of financial statement amounts. However, providing an opinion on
compliance with those provisions was not an objective of our audit.
Also, in accordance with OMB Circular A-133, Prado & Renteria CPAs will examine, on a test basis,
evidence about the City's compliance with the types of compliance requirements described in the
U.S. Office of Management and Budget (OMB) CircularA-133 Compliance Supplement applicable to
each of the City's major programs for the purpose of expressing an opinion on the City's compliance
with those requirements. While the audit provides a reasonable basis for the opinion, it does not
provide a legal determination on the City's compliance with those requirements.
Prado & Renteria CPAs will issue a separate document which contains the results of our audit
procedures to comply with OMB Circular A-133.
''� deoee memoe,o Page 13
BAKER TILLY
INTERNATIONAL
Honorable Elizabeth B. Tisdahl, Mayor and
Members of the City Council
City of Evanston, Illinois
OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS
Our responsibility does not extend beyond the audited financial statements identified in this report. We do
not have any obligation to and have not performed any procedures to corroborate other information
contained in client prepared documents, such as official statements related to debt issues.
PLANNED SCOPE AND TIMING OF THE AUDIT
We performed the audit according to the planned scope and timing previously communicated to you in
our letter about planning matters dated June 26, 2012.
QUALITATIVE ASPECTS OF THE ENTITY'S SIGNIFICANT ACCOUNTING PRACTICES
Accounting Policies
Management is responsible for the selection and use of appropriate accounting policies. In accordance
with the terms of our engagement letter, we will advise management about the appropriateness of
accounting policies and their application. The significant accounting policies used by the City of Evanston,
Illinois are described in Note 1 to the financial statements. As described in Note 1 to the financial
statements, the City of Evanston, Illinois changed accounting policies related to deferred outflows of
resources, deferred inflows of resources, and net position by adopting Statement of Governmental
Accounting Standards (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources,
Deferred Inflows of Resources, and Net Position in 2012. Accordingly, the effect of the accounting change
as of the beginning of the year is reported in the Statement of Net Position. We noted no transactions
entered into by the City of Evanston, Illinois during the year that were both significant and unusual, and of
which, under professional standards, we are required to inform you, or transactions for which there is a
lack of authoritative guidance or consensus.
Accounting Estimates
Accounting estimates are an integral part of the financial statements prepared by management and are
based on management's knowledge and experience about past and current events and assumptions
about future events. Certain accounting estimates are particularly sensitive because of their significance
to the financial statements and because of the possibility that future events affecting them may differ
significantly from those expected. The most sensitive estimates affecting the financial statements were:
Depreciation expense
Allowance for doubtful accounts
Insurance claims payable
OPEB liability
We evaluated the key factors and assumptions used to develop these estimates in determining that they
are reasonable in relation to the financial statements taken as a whole.
Financial Statement Disclosures
The disclosures in the financial statements are neutral, consistent, and clear.
DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT
We encountered no significant difficulties in dealing with management in performing our audit.
Page 14
Honorable Elizabeth B. Tisdahl, Mayor and
Members of the City Council
City of Evanston, Illinois
CORRECTED AND UNCORRECTED MISSTATEMENTS
Professional standards require us to accumulate all known and likely misstatements identified during the
audit, other than those that are trivial, and communicate them to the appropriate level of management.
In addition, none of the misstatements detected as a result of audit procedures and corrected by
management were material, either individually, or in the aggregate, to the financial statements taken as a
whole.
A summary of uncorrected financial statement misstatements follows this required communication.
Management has determined that their effects are immaterial, both individually and in the aggregate, to
the financial statements taken as a whole.
DISAGREEMENTS WITH MANAGEMENT
For purposes of this letter, professional standards define a disagreement with management as a matter,
whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter
that could be significant to the financial statements or the auditor's report. We are pleased to report that
no such disagreements arose during the course of our audit.
CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS
In some cases, management may decide to consult with other accountants about auditing and accounting
matters. If a consultation involves application of an accounting principle to the governmental unit's
financial statements or a determination of the type of auditors' opinion that may be expressed on those
statements, our professional standards require the consulting accountant to check with us to determine
that the consultant has all the relevant facts. To our knowledge, there were no such consultations with
other accountants.
MANAGEMENT REPRESENTATIONS
We have requested certain representations from management that are included in the management
representation letter. This letter follows this required communication.
INDEPENDENCE
We are not aware of any relationships between Baker Tilly Virchow Krause, LLP and the City of Evanston
that, in our professional judgment, may reasonably be thought to bear on our independence.
Relating to our audit of the financial statements of the City of Evanston for the year ended December 31,
2012, Baker Tilly Virchow Krause, LLP hereby confirms that we are, in our professional judgment,
independent with respect to the City in accordance with the Code of Professional Conduct issued by the
American Institute of Certified Public Accountants. We provided no services to the City other than audit
services provided in connection with the audit of the current year's financial statements and nonaudit
services which in our judgment do not impair our independence.
Page 15
Honorable Elizabeth B. Tisdahl, Mayor and
Members of the City Council
City of Evanston, Illinois
OTHER MATTERS
With respect to the supplementary information accompanying the financial statements, we made certain
inquiries of management and evaluated the form, content, and methods of preparing the information to
determine that the information complies with accounting principles generally accepted in the United
States of America, the method of preparing it has not changed from the prior period, and the information
is appropriate and complete in relation to our audit of the financial statements. We compared and
reconciled the supplementary information to the underlying accounting records used to prepare the
financial statements or to the financial statements themselves.
OTHER AUDIT FINDINGS OR ISSUES
We generally discuss a variety of matters, including the application of accounting principles and auditing
standards, with management each year prior to retention as the City's auditors. However, these
discussions occurred in the normal course of our professional relationship and our responses were not a
condition to our retention.
This information is intended solely for the use of those charged with governance and management and is
not intended to be, and should not be, used by anyone other than these specified parties.
We welcome the opportunity to discuss the information included in this letter and any other matters.
Thank ou for allowing us to serve you.
M
U ' %c, LLF
Oak Brook, Illinoi
June 28, 2013
Page 16
Governmental PcANit�es
ess Type ,,t,jWies
gusin
General Fund entFund
Capital ImPrO"em
Water Fund
ParlGng Fund
City of EvanstoSTATEMENT MISSTPN�MENTS
L
oRREc►EID FINANCIP
SU�MPFtY OF UNcpecember 31.2012
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change in
Cements Total Total Net Posit%on
Financial Sta cial Statement X ensesl Fund galanCes
dit to F roan E P
pebit cre Total Total Fjc e� 222 379
Net Positions Re= �1 p33)
glances t8,91,576
►abilifiesl Fund B765 465 7 �31'765
Total L flows 23 2183
Total Assets) peferred In 453 g81) -
ows 232132 2 g - �'_
peferred u �.9,462
1.316.397
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185.pg1 99.462
a
City of
Evanston
June 28, 2013
Baker Tilly Virchow Krause, LLP
1301 W. 22nd Street, Suite 400
Oak Brook, IL 60523
Dear Baker Tilly Virchow Krause, LLP:
City Manager's Office
2100 Ridge Avenue
Evanston, Illinois - 60201
T 847.866.2936
TTY 847.448.8064
We are providing this letter in connection with your audit of the financial statements of the City of Evanston
as of December 31, 2012 and for the year then ended for the purpose of expressing an opinion as to whether the
primary government financial statements present fairly, in all material respects, the respective financial position of
the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund
information of the City of Evanston and the respective changes in financial position and cash flows, where
applicable, in conformity with accounting principles generally accepted in the United States of America. We confirm
that we are responsible for the fair presentation of the previously mentioned financial statements in conformity with
accounting principles generally accepted in the United States of America. We are also responsible for adopting
sound accounting policies, establishing and maintaining internal control over financial reporting, and preventing and
detecting fraud.
Certain representations in this letter are described as being limited to matters that are material. Items are
considered material, regardless of size, if they involve an omission or misstatement of accounting information that,
in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on
the information would be changed or influenced by the omission or misstatement. An omission or misstatement that
is monetarily small in amount could be considered material as a result of qualitative factors.
We confirm, to the best of our knowledge and belief, the following representations made to you during your audit.
Financial Statements
1. We have fulfilled our responsibilities, as set out in the terms of the audit engagement letter.
2. The financial statements referred to above are fairly presented in conformity with accounting principles generally
accepted in the United States of America and include all properly classified funds and other financial information
of the primary government required by accounting principles generally accepted in the United States of America
to be included in the financial reporting entity.
3. We acknowledge our responsibility for the design, implementation, and maintenance of internal control relevant
to the preparation and fair presentation of financial statements that are free from material misstatement, whether
due to fraud or error.
4. We acknowledge our responsibility for the design, implementation, and maintenance of internal control to prevent
and detect fraud.
5. Significant assumptions we used in making accounting estimates are reasonable.
Baker Tilly Virchow Krause, LLP
June 28, 2013
Page 2
6. Related party relationships and transactions, including revenues, expenditures/expenses, loans, transfers,
leasing arrangements, and guarantees, and amounts receivable from or payable to related parties have been
appropriately accounted for and disclosed in accordance with the requirements of accounting principles generally
accepted in the United States of America.
7. All events subsequent to the date of the financial statements and for which accounting principles generally
accepted in the United States of America require adjustment or disclosure have been adjusted or disclosed. No
events, including instances of noncompliance, have occurred subsequent to the balance sheet date and through
the date of this letter that would require adjustment to or disclosure in the aforementioned financial statements.
8. We believe the effects of the uncorrected financial statement misstatements summarized in the attached
schedule are immaterial, both individually and in the aggregate, to the basic financial statements taken as a
whole. In addition, you have recommended adjusting journal entries, and we are in agreement with those
adjustments.
9. The effects of all known actual or possible litigation, claims, and assessments have been accounted for and
disclosed in accordance with accounting principles generally accepted in the United States of America.
10. Guarantees, whether written or oral, under which the City of Evanston is contingently liable, if any, have been
properly recorded or disclosed.
Information Provided
11. We have provided you with:
a. Access to all information, of which we are aware, that is relevant to the preparation and fair presentation of
the financial statements, such as records, documentation, and other matters.
b. Additional information'that you have requested from us for the purpose of the audit.
c. Unrestricted access to persons within the entity from whom you determined it necessary to obtain audit
evidence.
d. Minutes of the meetings of the City Council or summaries of actions of recent meetings for which minutes
have not yet been prepared.
12. All material transactions have been recorded in the accounting records and are reflected in the financial
statements.
13. We have disclosed to you the results of our assessment of the risk that the financial statements may be
materially misstated as a result of fraud.
14. We have no knowledge of any fraud or suspected fraud that affects the entity and involves:
a. Management,
b. Employees who have significant roles in internal control, or
c. Others where the fraud could have a material effect on the financial statements.
15. Except for situation disclosed to you during the audit, we have no knowledge of any allegations of fraud or
suspected fraud affecting the entity received in communications from employees, former employees, regulators,
or others.
16. There are no known instances of noncompliance or suspected noncompliance with provisions of laws,
regulations, contracts, or grant agreements, or abuse, whose effects should be considered when preparing
financial statements.
Baker Tilly Virchow Krause, LLP
June 28, 2013
Page 3
17. We have disclosed to you all known actual or possible litigation, claims, and assessments whose effects should
be considered when preparing the financial statements.
18. We have disclosed to you all known related parties and all the related party relationships and transactions of
which we are aware.
Other
19. We have made available to you all financial records and related data.
20. There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies
in, financial reporting practices. This excludes activities covered under the Single Audit Act.
21. We have taken timely and appropriate steps to remedy fraud, violations of laws, regulations, contracts or grant
agreements, or abuse that you have reported to us.
22. We have a process to track the status of audit findings and recommendations.
23. We have identified to you any previous financial audits, attestation engagements, and other studies related to
the audit objectives and whether related recommendations have been implemented.
24. We have provided our views on reported findings, conclusions, and recommendations, as well as our planned
corrective actions, for our report.
25. The City of Evanston has no plans or intentions that may materially affect the carrying value or classification of
assets, liabilities, or equity. This excludes the impact of GASB pronouncements to be implemented in future
years.
26. We are responsible for compliance with federal, state, and local laws, regulations, and provisions of contracts
and grant agreements applicable to us, including tax or debt limits and debt contracts; and we have identified
and disclosed to you all federal, state, and local laws, regulations and provisions of contracts and grant
agreements that we believe have a direct and material effect on the determination of financial statement
amounts or other financial data significant to the audit objectives, including legal and contractual provisions for
reporting specific activities in separate funds.
27. There are no:
a. Violations or possible violations of budget ordinances, federal, state, and local laws or regulations (including
those pertaining to adopting and amending budgets), provisions of contracts and grant agreements, tax or
debt limits, and any related debt covenants whose effects should be considered for disclosure in the financial
statements or as a basis for recording a loss contingency, or for reporting on noncompliance.
b. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by accounting
principles generally accepted in the United States of America.
28. In regards to the non -attest services performed by you listed below, we have 1) made all management
decisions and performed all management functions; 2) designated an individual with suitable skill, knowledge, or
experience to oversee the services; 3) evaluated the adequacy and results of the services performed, and 4)
accepted responsibility for the results of the services.
a. Compiled regulatory reports
Baker Tilly Virchow Krause, LLP
June 28, 2013
Page 4
This non attest service does not constitute an audit under generally accepted auditing standards, including
Government Auditing Standards.
29. The City of Evanston has satisfactory title to all owned assets, and there are no liens or encumbrances on such
assets nor has any asset been pledged as collateral.
30. The City of Evanston has complied with all aspects of contractual agreements that would have a material effect
on the financial statement in the event of noncompliance.
31. We have followed all applicable laws and regulations in adopting, approving, and amending budgets.
32. The financial statements include all component units as well as joint ventures with an equity interest, and
properly disclose all other joint ventures and other related organizations.
33. The financial statements properly classify all funds and activities.
34. All funds that meet the quantitative criteria in GASB Statement No. 34 and No. 37 for presentation as major are
identified and presented as such and all other funds that are presented as major are particularly important to
financial statement users.
35. Components of net position (net investment in capital assets; restricted; and unrestricted) and equity amounts
are properly classified and, if applicable, approved.
36. The City of Evanston has no derivative financial instruments such as contracts that could be assigned to
someone else or net settled, interest rate swaps, collars or caps.
37. Provisions for uncollectible receivables have been properly identified and recorded.
38. Expenses have been appropriately classified in or allocated to functions and programs in the statement of
activities, and allocations have been made on a reasonable basis.
39. Revenues are appropriately classified in the statement of activities within program revenues, general revenues,
contributions to term or permanent endowments, or contributions to permanent fund principal.
40. Inter -fund, internal, and intra-entity activity and balances have been appropriately classified and reported.
41. Deposits and investment securities are properly classified as to risk, and investments are properly valued.
42. Capital assets, including infrastructure and intangible assets, are properly capitalized, reported, and, if
applicable, depreciated/amortized.
43. We have appropriately disclosed the City of Evanston's policy regarding whether to first apply restricted or
unrestricted resources when an expense is incurred for purposes for which both restricted and unrestricted net
position are available and have determined that net position were properly recognized under the policy. We
have also disclosed our policy regarding how restricted and unrestricted fund balance is used when expenditure
is incurred for which both restricted and unrestricted fund balance is available, including the spending hierarchy
for committed, assigned, and unassigned amounts.
44. We acknowledge our responsibility for the required supplementary information (RSI). The RSI is measured and
presented within prescribed guidelines and the methods of measurement and presentation have not changed
from those used in the prior period. We have disclosed to you any significant assumptions and interpretations
underlying the measurement and presentation of the RSI.
Baker Tilly Virchow Krause, LLP
June 28, 2013
Page 5
45. With respect to the combining and individual fund financial statements and schedules:
a. We acknowledge our responsibility for presenting the combining and individual fund financial statements and
schedules in accordance with accounting principles generally accepted in the United States of America, and
we believe the combining and individual fund financial statements and schedules, including its form and
content, is fairly presented in accordance with accounting principles generally accepted in the United States
of America. The methods of measurement and presentation of the combining and individual fund financial
statements and schedules have not changed from those used in the prior period, and we have disclosed to
you any significant assumptions or interpretations underlying the measurement and presentation of the
supplementary information.
b. If the combining and individual fund financial statements and schedules is not presented with the audited
financial statements, we will make the audited financial statements readily available to the intended users of
the supplementary information no later than the date we issue the supplementary information and the
auditor's report thereon.
46. We assume responsibility for, and agree with, the findings of specialists in evaluating the post -employment
benefits, Police Pension Fund and Firefighter's Pension Fund and have adequately considered the qualifications
of the specialists in determining the amounts and disclosures used in the financial statements and underlying
accounting records. We did not give or cause any instructions to be given to specialists with respect to the
values or amounts derived in an attempt to bias their work, and we are not otherwise aware of any matters that
have had impact on the independence or objectivity of the specialists.
Sincerely,
City of Evanston
Signed: IAJMAI
Wally Bobkiew' Manager
Signed:
Martin Lyons, Assistant Onager/Chief Financial Officer