http://www.inventpa.com Communities in PA Governor's Center for Local Government Services Auditors Guide Ninth Edition Harrisburg, October 1998 Additional copies, comments or inquiries on the subject matter of this publication should be addressed to: The Governor’s Center for Local Government Services 325 Forum Building Harrisburg, Pennsylvania 17120 1-888-2CENTER (223-6837) Preparation and printing of this edition of the Auditors Guide was funded from appropriations of the General Assembly of the Commonwealth of Pennsylvania. Copyright © 1998, Pennsylvania Department of Community and Economic Development, all rights reserved. Table of Contents I. Introduction 1 II. Powers and Duties of Office 5 1. Elected Auditors of Boroughs 5 2. Elected Controllers Of Boroughs 8 3. Independent Auditor For Boroughs 10 4. Elected Auditors of First Class Townships 10 5. Elected Controllers of First Class Townships 13 6. Independent Auditor for First Class Townships 14 7. Elected Auditors of Second Class Townships 15 8. Independent Auditor for Second Class Townships 20 9. Auditing Municipal Authorities 21 10. Auditing Earned Income Taxes 22 11. Advisory Role of Elected Auditors 22 12. Single Audit Act 23 III. Audit Programs 25 1. Planning the Audit 25 2. Evaluation of Existing Internal Control Procedures 28 3. General Fund: Revenues, Receivables, Receipts, Assets 32 4. The General Fund: Expenditures and Related Liabilities 42 5. Special Revenue Funds 45 6. Utility Funds 46 7. Special Assessment Funds 48 8. Debt and Debt Service Accounts 49 9. Sinking Funds 50 10. Capital Projects Fund 52 11. Other Borough and Township Funds 53 12. State Highway Aid Fund 54 13. Agency and Trust Funds 56 14. Accounts of Tax Collectors, Township Treasurers and District Justices 57 15. Interim Audit Check List for Elected Auditors 59 IV. Annual Financial Reports 61 1. Financial Statements 61 2. Reports Required by the Department of Community and Economic Development 62 3. Published Financial Statements 63 V. Appendix 65 1. Glossary of Terms 65 2. Internal Control Questionnaire 73 3. Standard Bank Confirmation Inquiry 75 I. Introduction Purpose of Guide Boroughs and townships are required by their codes to have an annual audit made by either: (1) three elected auditors, or (2) an elected controller, or (3) under certain circumstances, certified public accountants or public accountants who may be appointed to make the audit instead of or in addition to the elected auditors. The elected auditor system is used almost exclusively in smaller townships and boroughs. This guide outlines what work auditors are expected and required to do. The Department set several goals in preparing the Guide: First, to give direction and purpose to the elected auditors as they begin their audit task. Second, to acquaint elected auditors with their duties and responsibilities under the borough and township codes. Third, to outline the scope of an audit of a borough or township; to suggest programs for the audit of the various funds, and of the accounts of certain officials such as: tax collector, district justice and treasurer. Fourth, to offer instruction in the preparation of the uniform financial reports required to be filed with the Department of Community and Economic Development. The Primary Purpose of Auditing The auditor examines the accounting records and accounting practices of the organization or agency under review to enable him to express an informed opinion as to whether or not the balance sheet and the statement of revenues and expenditures prepared from the books and records present fairly the financial position and the results of operations of the municipality, and whether the municipality complied with applicable laws and regulations. The independent review by the auditor includes judgments as to facts, supporting evidence, and adherence to generally accepted accounting principles applied consistently from year to year. In addition to these broad assignments, the auditor should be alert to possible irregularities and fraud, as well as weaknesses in internal control. It is important for the auditor to inform the responsible officials about such weaknesses when they are discovered. Auditing Techniques In fulfilling this primary purpose, the auditor generally obtains evidential material to form and support his conclusion on the financial statements. The auditor obtains the evidence in several ways: 1. Analysis and Review. A careful analysis and critical review of data presented by the municipality with a view to determining its reasonableness and reliability. 2. Observation. The auditor is present to observe how various procedures are being performed by the employees. 3. Inspection. The inspection of physical assets, such as securities, cash, inventories, as well as documents and other evidence supporting the figures in the accounting records. 4. Confirmation. Verify the correctness of the books under audit by direct advice from an individual, agency or company in a position to verify such items. The most common example of this technique is confirmation of bank balances directly with the bank or banks where the moneys are kept. 5. Inquiry. Secure information by discussing various transactions and other financial matters with officers and employees of the agency or organization under audit. The alert auditor will gain a better understanding of points not set forth clearly in the records or perhaps not disclosed in the books of account. The Nature of Governmental Accounting It is the purpose of governmental accounting to provide factual information concerning the financial operations of the governmental unit under consideration. This information constitutes an important tool in making plans, controlling, administering and reporting to interested parties. Some of those interested in the accounting results are: The administrative or managing staff The legislative body (borough council, board of commissioners or board of supervisors) Investors (those who purchase bonds issued by the municipality) The public and individual taxpayers State supervisory agencies Students of government and public finance It should be emphasized that accounting is not a substitute for effective and efficient action on the part of the administrative staff and legislative body. Accounting is a means of facilitating such action. Accounting — both commercial and governmental — is a systematic method whereby financial transactions are analyzed, classified, recorded in books of original entry and posted to general and subsidiary ledgers, trial balance summaries are compiled, and, finally, financial statements are prepared. Financial or business transactions are exchanges of values measured in terms of money, that is, the receipt of money for taxes levied or the incurring and paying of an obligation for wages earned in cash. Transactions are evidenced by documents such as receipts, deposit tickets, checks, vouchers, and contracts. Recording may be done by longhand pen and ink methods, bookkeeping machines, electronic data processing or by combinations of these methods. For-profit accounting is designed to match revenues with corresponding expenses in the proper accounting period. The objective of governmental accounting, however, is to control and illustrate the proper authorization for expenditures. Because of this, governmental accounting has certain peculiar features: 1. Legal Requirements. Governmental accounting and finance for local units, such as boroughs and townships, are governed by the provisions of the borough and township codes, the uniform budget and financial report forms of the Department of Community and Economic Development and the debt and taxation limitations imposed by the Pennsylvania Constitution and the laws of the General Assembly. 2. Legal Status of Budget. Statutory requirements also provide that a budget (which will control the expenditures for a given fiscal year) must be adopted by the legislative body. The budget must include revenue estimates as well as detailed classification of expenditures arranged in such form that it may be compared with actual revenues and expenditures set forth in the annual financial report. 3. Use of Funds. Governmental units have a number of purposes, activities, and agencies to deal with. The use of separate funds ensures that money is expended for the purpose for which the fund is established. The term fund has been defined by the National Committee on Governmental Accounting as “a sum of money or other resources segregated for the purpose of carrying on of specific activities and attaining certain objectives in accordance with special regulations, restrictions, or limitations and constituting an independent fiscal and accounting entity.” This means each fund is a separately maintained, self-balancing set of books which is established for various specific reasons or activities. Each fund requires, in effect, a complete bookkeeping system. There are three basic types of funds — governmental, proprietary, and fiduciary. Governmental funds are used to account for the ongoing activities of governments. These activities usually are financed by general government revenues, such as taxes, license fees, grants, and entitlements. Governmental funds are generally accounted for on the modified accrual basis of accounting. Proprietary funds are similar to ongoing businesses with operating expenses being met with current revenues. These funds are generally financed with user service charges and are accounted for on the accrual basis of accounting under ideal circumstances. Fiduciary funds are used to account for situations where the governmental unit is acting as a trustee or agent for individuals or other governments. These funds may be maintained on the accrual or modified accrual basis of accounting. The funds most widely used in Pennsylvania local governmental units are: General Fund Governmental Fund Special Revenue Funds Governmental Capital Projects Funds Governmental Utility Funds Proprietary Special Assessment Bond Funds Governmental Sinking Funds Governmental Capital Reserve Funds Governmental Highway Aid Fund Governmental Agency and Trust Funds Fiduciary These funds are explained in the Guide where the audit program is outlined for each. Comparison of Commercial and Governmental Accounting The same general principles and procedures are generally followed in the same manner as in commercial and governmental accounting. In the following respects the two types of accounting are similar: a. Transaction analysis, books of original entry and ledgers are similar in principle. b. A proper classification of accounts is essential to the preparation of financial statements. c. Uniform accounting terminology is very useful. However, there are certain fundamental features which are peculiar to governmental accounting; a. The absence of the profit and loss motive in government. b. The use of budgets and funds within the accounting system. c. The legal requirements governing the operations of a local governmental unit. d. Depreciation of fixed assets, except possibly in the case of proprietary and fiduciary funds, is not used in governmental accounting. e. In Pennsylvania, uniform financial report and budget forms are mandated by law and provided by the Department of Community and Economic Development. II. Powers and Duties of Office 1. Elected Auditors of Boroughs Election In boroughs which have not established the office of controller, nor employed an independent auditor, three auditors are elected for a term of six years. One auditor is elected at each municipal election, providing for overlapping membership on the board.1 Vacancies in the office of auditor are filled by borough council. If the vacancy is for more than two years, a new auditor is elected at the next municipal election coming at least sixty days after the vacancy occurs.2 Auditors may be paid between fifteen and thirty dollars per day, as council determines. Each day is to consist of not less than five hours employed in the discharge of their duties.3 Organization The auditors meet annually on the first Tuesday of January. They organize by electing a chair and a secretary.4 Two auditors constitute a quorum and may take official action as the board of auditors.5 However, a single auditor acting alone has no legal authority.6 The auditors may employ an attorney when deemed advisable by a majority of the board. The attorney’s compensation is fixed by the auditors, but cannot exceed the sum payable to one auditor for making the annual audit, unless a greater compensation is allowed by council or the court in connection with any proceeding before it.7 Auditing, Adjusting and Settling Accounts The auditors must audit, adjust and settle the accounts of the tax collector, district justice and all officers of the borough. They may also audit the accounts of any person, organization or agency receiving or spending borough funds.8 In addition to the annual audits after the end of the fiscal year, the auditors are also required to audit and report to the borough council on the accounts of every officer upon their death, resignation or removal from office.9 Witnesses; Documents Auditors may compel the attendance of witnesses, administer oaths, petition the court to issue subpoenas to persons refusing to testify, authorize the payment of witnesses and settle accounts where witnesses do not appear.10 Auditors have the right to compel boroughs officials to appear at meetings with books, vouchers and papers for audit.11 In a case where certain members of borough council refused to answer questions on the grounds that such answers might incriminate, and other parts of their testimony were confusing and evasive, the court held they must be surcharged. Whether other council members were guilty of such negligence as to be surcharged had to be determined by elimination, keeping in mind that they could not be absolved by ignorance nor relieved from the effects of mere carelessness or error.12 Audit Report Each year, auditors must prepare a report containing an audit of the accounts of the last fiscal year. It must show a complete statement of the financial condition of the borough, including details of indebtedness, value of taxable property and a listing of the assets of the borough. The report is to be prepared within ninety days after the close of the fiscal year. Uniform forms for the report as mandated by law, are provided by the Department of Community and Economic Development. Copies of the report must be filed with the borough secretary, clerk of the court of common pleas and the Department of Community and Economic Development. Reports filed with the Department should be sent to: Governor’s Center for Local Government Services Department of Community and Economic Development Room 325, Forum Building Harrisburg, PA 17120 Failure to file the report, on conviction in a summary proceeding, means a fine of five dollars for each day’s delay in filing up to a total of two hundred dollars for each auditor.13 The audit is to cover only the fiscal year immediately preceeding. No action taken on prior years’ accounts has any validity.14 The decision of the auditors in prior years’ reports is conclusive if it has not been challenged during the appeal period. An auditors’ report is final and conclusive when it is filed. It cannot be opened for correction of errors or additional inquiry into by auditors.15 An auditors’ report cannot be reopened because the auditors had been unfamiliar with certain technical and legal requirements and had discovered new facts.16 Surcharges The amount of any balance or shortage, or any expenditure made in a manner prohibited or not authorized by law, which causes a financial loss to the borough, must be surcharged against any officer responsible for the balance or shortage, or who by vote, act or neglect, has permitted or approved the expenditure. No elected or appointed officer is to be surcharged in excess of the actual financial loss sustained by the borough, based on the differing results produced by the act, error or omission and those produced had the procedure been strictly according to law. The limits on the amount of surcharge do not apply to cases involving fraud or collusion on the part of officers nor to any penalty payable to the Commonwealth.17 Any official knowingly and willfully acting contrary to law in any matter involving any financial transaction can be found guilty of a misdemeanor, subject to a fine not exceeding one hundred dollars and his office being declared vacant.18 In making a surcharge, the auditors must name an individual. An attempted surcharge against borough council as a body was disallow by the court.19 Surcharge can be made where officials permitted or approved unauthorized expenditures from the borough treasury, causing a financial loss to the borough.20 This includes council members who, by their vote, had authorized an illegal expenditure or, knowing it was illegal, neglected to inform council as a whole.21 This does not apply to council members who commit honest errors of judgment in discharge of their duties. Procedures to Complete Audit All orders, vouchers and certificates of indebtedness which have been marked paid must be canceled by the auditors by writing or stamping the word “audited” on their face.22 Within ten days after the audit is completed, the auditors must publish a concise financial statement in at least one newspaper of general circulation in the borough. The statement is to include: – the balance in the treasury at the beginning of the year – all revenues received by major classifications – all expenditures by major functions – the current resources and liabilities of the borough at the end of the fiscal year – the gross liability and net debt of the borough – the assessed valuation of the borough – the assets of the borough and their description – the date of the last maturity of each form of funded debt and the assets in each sinking fund23 Appeals from Audit The report of the auditors may be appealed by the borough, by any taxpayer of the borough, or by any officer whose account has been settled. Appeals must be taken to the court of common pleas within forty days of the date of filing of the report with the clerk.24 The remedy provided in the Borough Code for judicial review of the report of borough auditors by appeal to the court of common pleas is the exclusive remedy under law.25 Under the Borough Code, if a taxpayer believes that members of council have violated the Borough Code in authorizing the purchase of goods and services, the sole remedy is for the taxpayer to appeal the report of borough auditors within the forty-day period after filing.26 Appeals by taxpayers or officers require a $1,000 bond and security to prosecute and pay all costs if a more favorable decision is not achieved.27 When council members appealed an auditor’s surcharge and lost, they were required to pay all costs.28 In any proceeding on appeal, the accounts of any surcharged officer or organization may be examined again, but the burden is upon the surcharged party to establish credits claimed against the amount due. The opposing party may use findings in the auditors’ report as prima facie evidence against the surcharged officer or organization.29 In an appeal from a report of the borough auditors, the burden is placed on the public officers to establish the propriety of all expenditures made by them.30 Several appeals may be combined into a single proceeding. After a hearing, the court files its findings of fact and law and enters judgment. Exceptions to the court’s decision may be appealed to the appellate court. Balances due to the borough in the account of any officer constitute a surcharge, and the amount is entered as a judgment by the prothonotary, if there is no appeal.31 Penalties Imposed on Auditors In a case of neglect or refusal of any auditor to comply with the Borough Code requirements, the auditor is liable to a fine of not more than one hundred dollars or, in default of the fine and costs, to be imprisoned for not more than ten days.32 Auditors cannot be sued to recover embezzled funds lost due to inadequate audits over several years. They are protected by governmental immunity. The appropriate remedy for negligent performance by auditors are the penalties provided in Section 1054 of the Borough Code.33 References 1. 53 P.S. 45831; Borough Code, Section 831. 2. 53 P.S. 45901; Borough Code, Section 901. 3. 53 P.S. 46053; Borough Code, Section 1053. 4. 53 P.S. 46041(a); Borough Code, Section 1041(a). 5. 1 PA C.S.A. 1905; In re Borough of Rankin, 31 A.2d 543, 347 Pa.40, 1943. 6. Hoffacker v. Hanover Borough, 25 Dist. 960, (1916). 7. 53 P.S. 40652; Borough Code, Section 1052. 8. 53 P.S. 46041(b); Borough Code, Section 1041(b). 9. 53 P.S. 40641(g)’ Borough Code, Section 1041(g). 10. 53 P.S. 46055 to 46059; Borough Code, Section 1055 to 1059. 11. Petition of Auditors of Borough of Nuangola, 34 Luz. L. Reg. Rep. 321, 1941. 12. Appeal from Auditors’ Report, Dupont Borough, 38 Luz. L. Reg. Rep. 281, 1946. 13. 53 P.S. 46041(d); Borough Code, Section 1041(d). 14. Auditor’s Report, 20 Lack., 295, 11 Mun. 129, 1919. 15. Steelton Borough v. Detweiler, 26 Dauph. 270, 1923. 16. Bond v. Fernandez, 66 D.&C.2d. 494, 33 Beaver 199, 1974. 17. 53 P.S. 46041(c); Borough Code, Section 1041(c). 18. 53 P.S. 46041(e); Borough Code, Section 1041(e). 19. Appeal of Baden Auditors’ Report, 20 Beaver 141, 50 Mun. 190, 1959. 20. In re Borough of Rankin, 31 A, 2d 543, 347 Pa. 40, 1943. 21. Appeal of William, 29 Mun. 177, 86 P.L.J. 241, 1938. 22. 53 P.S. 46042; Borough Code, Section 1042. 23. 53 P.S. 46043; Borough Code, Section 1043. 24. 53 P.S. 46044; Borough Code, Section 1044. 25. In re Annual Audit of Borough of Turtle Creek, 163 A. 2d 876, 401 Pa. 201, 1960. 26. Gribble v. Miller, 284 A 2d. 825, 3 Pa. Cmwlth. 520, 1971. 27. 53 P.S. 46045; Borough Code, Section 1045. 28. In re Baden Auditors Report, 21 Beaver 128, 1960. 29. 53 P.S. 46047; Borough Code, Section 1047. 30. Appeal from Statement of Audit of Finances of Borough of Monaca, 35 Mun. 111, 1944. 31. 53 P.S. 46049,46050,46051; Borough Code, Sections 1049, 1050 and 1051. 32. 53 P.S. 46054; Borough Code, Section 1054. 33. Borough of West Fairview v. Hess, 568 A. 2d 709, 150 Pa. Cmwlth. 385, 1989. 2. Elected Controllers Of Boroughs Establishing Office Borough council may establish the office of controller by enacting an ordinance. Upon petition, the court of common pleas appoints a controller to hold office until the first Monday of January after the next municipal election, when a controller is elected.1 The appointed or elected controller takes office. The controller is elected to a four-year term. Qualifications The Borough Code requires the controller to be a competent accountant.2 The court has ruled that this requirement is “directory” and not “mandatory” and a matter for the voters themselves to decide.3 The controller must be a registered voter of the borough for at least four years prior to his election. The court has held that this requirement is mandatory and the controller must have resided in the borough for at least four years immediately prior to the election.4 The controller must take an oath to perform the duties of office with fidelity and a loyalty oath. The controller must give bond to the borough with a surety company approved by council. The amount of the bond is set by ordinance and must be sufficient to protect the borough from any illegal or unfaithful action by the controller. The premium is paid by the borough.5 In a court case the report of a controller who had been elected to office, but whose bond had not been approved by borough council, was voided by the court.6 Salary Borough council must fix the annual salary of the controller, but may not increase or decrease this salary more often than once in two years.7 Auditing and Settling of Accounts The controller has all the power and performs all the duties vested in the elected auditors. The annual audit must be filed and published in the same manner as required of auditors. The accounts of all borough officers and departments authorized to receive and disburse public moneys must be audited.8 In the making of any audit or settlement, the controller has the same power to require the attendance of witnesses and the production of books and papers as given to auditors.9 A borough controller whose term has ended has full power to compel attendance of witnesses and production of books and documents in making the final audit of borough accounts for the year preceding the expiration of his term.10 Appeals may be made from the controller’s settlements and audits as shown in the report to the court of common pleas, subject to the same procedures as apply to elected auditors of the borough.11 Supervising Borough Finances In addition to the auditing function, the borough controller reviews the daily financial transactions of the borough. The controller countersigns each warrant drawn upon the borough treasurer, but only after determining it is properly due, made out to the right person, the goods or services purchased have been received and there are sufficient funds to pay for it in the appropriation.12 The controller may at any time require a statement from any borough officer of borough money or property in their control or possession. The controller has the power to verify bank accounts. 13 Any irregularities discovered must be immediately reported to council. The controller must keep a regular set of books showing all appropriations, all receipts and expenditures of borough officers, departments and agencies, and all trust accounts of the borough.14 The controller has the power to suggest plans to council for the management and improvement of borough finances, as deemed expedient or at the direction of council.15 References 1. 53 P.S. 4607l; Borough Code, Section 1071. 2. 53 P.S. 45841; Borough Code, Section 841. 3. Com. ex rel. Adams v. Stephens, 28 A. 2d 924, 345 Pa 436, 1942. 4. Ibid. 5. 53 P.S. 46061; Borough Code, Section 1061. 6. Controller’s Report, 83 Pitts. 245, 1934. 7. 53 P.S. 46062; Borough Code, Section 1062. 8. 53 P.S. 46063; Borough Code, Section 1063. 9. 53 P.S. 46064; Borough Code, Section 1064. 10. Com. ex rel. Eagen v. Petrusefski, 12 A. 2d 3, 338 Pa. 278, 1940. 11. 53 P.S. 46070; Borough Code, Section 1070. 12. 53 P.S. 46065,46066,46067; Borough Code, Section 1065,1066 and 1067. 13. 53 P.S. 46063; Borough Code, Section 1063. 14. 53 P.S. 46069; Borough Code, Section 1069. 15. 53 P.S. 46068; Borough Code, Section 1068. 3. Independent Auditor For Boroughs Appointment By an ordinance passed by a two-thirds vote of the entire number of council members elected, council may create the office of independent auditor. Council annually appoints an independent auditor by resolution before the close of the fiscal year. The independent auditor must be a certified public accountant, a firm of certified public accountants, a competent public accountant or a competent firm of public accountants. When the office of independent auditor has been established, the office of elected auditors or controller is abolished. Those elected auditors or controllers still in office complete their terms, but do not make the annual audit.1 Powers The powers of the independent auditor are similar to those of the elected borough auditors.2 This includes the responsibility to levy a surcharge against any officer responsible for any shortage or illegal expenditure uncovered in the audit. References 1. 53 P.S. 46005(7); Borough Code, Section 1005(7). 2. 53 P.S. 46196,46197,46198,46199; Borough Code, Sections 1196, 1197, 1198 and 1199. 4. Elected Auditors of First Class Townships Election In townships of the first class which have not established the office of controller nor employed an independent auditor, three auditors are elected for a term of six years. One auditor is elected at each municipal election, providing for overlapping membership on the board.1 Auditors must be registered voters of the township.2 Auditors may not hold any other elective or appointive office.3 The office of party committeeman has been held incompatible with that of township auditor.4 Vacancies in the office of auditor are filled by the board of commissioners. If the vacancy is for more than two years, a new auditor is elected at the next municipal election coming at least sixty days after the vacancy occurs.5 Auditors are paid twenty dollars a day. A day consists of at least five hours employed in the duties of their office. In townships of less than three thousand population, auditors must complete their audit in twenty days; in townships of more than three thousand, but less than ten thousand, thirty days; in townships of ten thousand and more, forty days.6 Organization The auditors meet annually on the day following the organization meeting of the township commissioners. Two auditors constitute a quorum and may take official action as the board of auditors.7 A single auditor acting alone has no legal authority. The auditors may employ an attorney in case of a disagreement with any officials or boards they must audit. Before an attorney is employed, a reasonable effort to reach agreement must be made, and notice must be given to the audited party. Compensation for the attorney is limited to thirty dollars, unless an appeal is taken to court, in which case the court fixes additional compensation.8 Auditing, Adjusting and Settling Accounts The auditors must audit, settle and adjust the accounts of the township commissioners, township treasurer, tax collector, secretary and other officers receiving and disbursing or authorizing the disbursement of township funds during the preceding fiscal year. The auditors audit the accounts of the district justice for the township to determine the amount of fines and costs paid or due to the township.9 The auditors must cancel all orders and vouchers presented to them which they find have been paid by writing the word “audited” on their face.10 The settlement of accounts of the treasurer and tax collector by the auditors includes accounting for all monies received and collected and for any credits against the funds collected, such as vouchers for money paid out as expenses connected with collection of township monies.11 Witnesses; Documents The auditors may issue subpoenas to obtain the attendance of officers and persons whose accounts they are auditing and any persons necessary to examine as witnesses. They may also compel the production of all books, vouchers and papers relative to such accounts. Auditors can administer oaths and affirmations to all persons appearing before them.12 All district justices must open and make available to the auditors their dockets, transcripts, records and all other official books or papers for the purpose of the audit.13 Surcharges Any officer whose actor neglect has contributed to the financial loss of the township must be surcharged by the auditors with the amount of such loss.14 Any balance against any officer of the township will constitute a surcharge against the officer as fully as if expressly stated in the report to be a surcharge. Unless appealed, the auditors must direct the clerk of the court of common pleas to certify the amount of every balance or surcharge and the prothonotary must enter it as a judgment against the officer in favor of the township.15 In any case where the district justice charges a fine contrary to ordinances or to any act which makes the fine payable to the township, the auditors have the power to surcharge the justice any amount undercharged.16 Report; Publication The auditors must complete their audit, settlement and adjustment within as short a time as possible. They file copies of the report with the secretary of the township, the clerk of court or prothonotary as provided by local rules of court and the Department of Community and Economic Development not later than ninety days after the close of the fiscal year.17 The court has ruled that this deadline is directory rather than mandatory. Failure to file within the prescribed time will not prevent reports from being valid.18 The audit report is final. Substantive changes cannot be made in the report after it is filed. Where a report was in substantive compliance with the law, the court allowed adding the prescribed oath and proof of publication within the 45-day appeal period.19 Within ten days after completion of their report, the auditors must publish a concise financial statement in a newspaper of general circulation in the township. The report must contain: – the balance in the treasury at the beginning of the fiscal year; – all revenues received by major classifications; – all expenditures made by major functions; – the current resources and liabilities of the township at the end of the year; – the gross liability and net debt; – the amount of the assessed valuation of the township; – details of township assets; – the date of the last maturity of each form of debt; – and the assets of sinking funds. The audit report and financial statement must be made on uniform forms mandated by law and provided by the Department of Community and Economic Development. They must be signed by all the auditors and the report must be verified by the oath of one of the auditors. Reports filed with the Department of Community and Economic Development should be sent to: Governor’s Center for Local Government Services Department of Community and Economic Development Room 325, Forum Building Harrisburg, PA 17120 Failure to file the report, on conviction in a summary proceeding, means a fine of five dollars for each auditor for each day’s delay in filing. All fines received are credited to the Commonwealth.20 Appeals from Audit The township, any registered voter or taxpayer, or any officer or person whose account is audited may appeal from the audit to the court of common pleas within forty-five days after the settlement has been filed.21 The provision in the First Class Township Code is the exclusive statutory remedy for any challenge to an audit report.22 Registered voters, taxpayers and officers appealing a report must post a bond to cover costs, if they fail to win a decision more favorable than the report. When more than one appeal is taken from a report, they may be consolidated and the court can frame an issue for trial. After a hearing, the court enters its judgment and assigns costs. Appeals may be taken to higher courts.23 Penalty Any auditor neglecting or refusing to comply with the provisions of the First Class Township Code is subject to a penalty of one hundred dollars to be recovered by suit, instituted in the name of the township on the complaint of any taxpayer. The penalty is to be paid into the township treasury.24 If any township officer refuses or neglects to perform his duties, one hundred citizens, owners of real estate residing in the township, may file a complaint with the court of common pleas. Upon a hearing of the proof that the facts alleged in the complaint are true, the court may declare the office vacant and appoint someone else to serve for the unexpired term.25 References 1. 53 P.S. 55520; First Class Township Code, Section 520. 2. 53 P.S. 55501; First Class Township Code, Section 501. 3. 53 P.S. 55520; First Class Township Code, Section 520. 4. In re Lower Chichester Twp. Auditor, 23 D.&C.2d 176, 1982. 5. 53 P.S. 55530; First Class Township Code, Section 530. 6. 53 P.S. 56001; First Class Township Code, Section 1001. 7. Ibid. 8. 53 P.S. 56006; First Class Township Code, Section 1006. 9. 53 P.S. 56001; First Class Township Code, Section l001. 10. 53 P.S. 56004; First Class Township Code, Section 1004. 11. Skelton v. Lower Merion Twp., 178 Atl 387, 318 Pa. 356, 1935. 12. 53 P.S. 56002; First Class Township Code, Section 1002. 13. 53 P.S. 56001; First Class Township Code, Section 1001. 14. 53 P.S. 56003; First Class Township Code, Section 1003. 15. 53 P.S. 56007; First Class Township Code, Section 1007. 16. 53 P.S. 56001; First Class Township Code, Section 1001. 17. 53 P.S. 56003; First Class Township Code, Section 1003. 18. In re Auditors’ Report for Neville Twp, Allegheny County, 70 A. 2d 379, 166 Pa. Super. 122, 1950. 19. Ibid 20. 53 P.S. 56003; First Class Township Code, Section 1003. 21. 53 P.S. 56009: First Class Township Code, Section 1009. 22. Neville Twp., supra. 23. 53 P.S. 56010 through 56018; First Class Township Code, Section 1010 through 1018. 24. 53 P.S. 56005; First Class Township Code, Section 1005. 25. 53 P.S. 55604; First Class Township Code, Section 604. 5. Elected Controllers of First Class Townships Establishing Office The board of township commissioners may, by ordinance, establish the office of controller. When the office of controller is established, the office of township auditor is abolished. The court of common pleas, on petition of the commissioners, appoints a controller to hold office until the first Monday of January after the next municipal election, at which a controller is elected.1 The controller is elected for a four-year term. Qualifications The controller must be a registered voter of the township and a competent accountant.2 The First Class Township Code does not further define competency. However, a court held that a milk wagon driver-salesman whose sole experience in accounting was keeping his customers’ accounts in a routebook was not a competent accountant within the meaning of the Code.3 The controller must take the oath required of township officers. The controller must give bond to the township in the amount of twenty thousand dollars with a surety company approved by the board of commissioners.4 Salary The salary of the controller is to be fixed by ordinance passed at least thirty days before the date of the election. The salary is not to exceed five thousand dollars.5 Auditing and Settling of Accounts The controller has all the powers and performs all the duties vested in the elected auditors of a first class township. The annual report of the audit must be made and filed in the same manner required of auditors. All accounts in which the township is concerned must be examined, audited and settled by the controller. The controller must also audit and report on the account of any township officer upon their death, resignation, removal or the expiration of their term. The controller has the same power as auditors to require the attendance of witnesses and the production of books and papers.6 Appeals may be taken from the controller’s audit report in the same manner as appeals from auditors’ reports.7 Supervising Township Finances In addition to the auditing function, the township controller monitors the daily financial transactions of the township. The controller countersigns each warrant drawn upon the township treasurer, but only after determining it is properly due, made out to the right person, the goods or services purchased have been received and there are sufficient funds to pay for it in the appropriation.8 The controller may at any time require a statement from any township officer of township money or property in their control or possession. The controller has the power to verify bank accounts. Any irregularities discovered must be immediately reported to the board of commissioners.9 The controller must keep a regular set of books showing all appropriations, all receipts and expenditures of township officers, departments and agencies, and all trust accounts of the township.10 The controller has the power to suggest plans to the board of commissioners for the management and improvement of township finances, as deemed expedient or at the direction of the board.11 References 1. 53 P.S. 55526; First Class Township Code, Section 526. 2. 53 P.S. 55525; First Class Township Code, Section 525. 3. Petition of Horton, 11 D.&C.2d 706, 1959. 4. 53 P.S. 56101; First Class Township Code, Section 1101. 5. 53 P.S. 56102; First Class Township Code, Section 1102. 6. 53 P.S. 56103; First Class Township Code, Section 1103. 7. 53 P.S. 56109; First Class Township Code, Section 1109. 8. 53 P.S. 56104; First Class Township Code, Section 1104. 9. 53 P.S. 56103; First Class Township Code, Section 1103. 10. 53 P.S. 56108; First Class Township Code, Section 1108. 11. 53 P.S. 56107; First Class Township Code, Section 1107. 6. Independent Auditor for First Class Townships Appointment Instead of electing three auditors or a controller, a township may provide for the audit of its accounts by an independent auditor by ordinance. The auditor must be a certified public accountant, a firm of certified public accountants, a competent public accountant or a competent firm of public accountants. The independent auditor is appointed annually by resolution at least thirty days before the close of the fiscal year. When an independent auditor is appointed, the office of elected auditor is abolished. Compensation of the independent auditor is set by the board of commissioners.1 Powers The independent auditor has all the powers and must perform all the duties outlined in the First Class Township Code for elected auditors.2 References 1. 53 P.S. 55520; First Class Township Code, Section 520. 2. Ibid. 7. Elected Auditors of Second Class Townships Election Each township of the second class elects three auditors.1 At each municipal election, one auditor is elected to serve for a term of six years.2 Auditors must be registered voters of the township.3 They may not be employed by the township or hold any other elective or appointive office in the township. Auditors must have resided continuously in the township for at least one year immediately prior to their election.4 Vacancies in the office of auditor are filled by the board of supervisors. The appointed successor serves until a new auditor is elected at the next municipal election coming at least sixty days after the vacancy occurs.5 Auditors are paid at the rate of $7 for each hour necessarily employed in discharging their duties of office. An itemized listing of the dates, times, places, and hours worked to perform the audit must be submitted to the township supervisors. In townships of less than 10,000 population, no auditor may receive more than $700 for completing the audit. In townships of more than 10,000 population, the maximum amount that may be paid to any auditor is limited to $1,400. In addition to amounts received for completing the annual audit, each auditor may receive compensation at the rate of $7 per hour for auditing the accounts of any public official who handles public funds when a vacancy in office occurs. No more than fifty hours may be spent by each auditor in completing audits required because of vacancies in office. Each auditor is also reimbursed for necessary travel costs at rates as set by the township supervisors in accordance with the Uniform Mileage Fee Law. Other expenses including postage, notary fees, and publication costs related to the audit are also reimbursable.6 Organization The auditors meet annually, at the place of meeting of the supervisors, on the day following the day fixed for the organization of township supervisors. They organize by electing a chair and a secretary. Two auditors constitute a quorum.7 The auditors may petition the court of common pleas to employ an attorney to represent them in cases of disagreement with any officials or boards they must audit. Before an attorney is employed, a reasonable effort to reach agreement must be made and notice must be given to the audited party. Compensation for the attorney is determined by agreement between the auditors and supervisors and is paid from the township general fund. If the dispute results in litigation, or if the auditors and supervisors cannot agree on the amount to be paid to the attorney, the attorney’s compensation is determined by the court.8 Auditing, Adjusting and Settling Accounts The auditors must audit, adjust and settle the accounts of all elected or appointed township officials, boards, or agencies that received, disbursed, or were otherwise entrusted with township funds during the preceding year. They also may audit the accounts of the district justice for the township to determine the amount of fines and costs paid or due to the township. Unless otherwise agreed to by the auditors and the officer being audited, the audit shall be conducted at the place where the records of the officer are normally kept.9 When any of the above offices becomes vacant through death or resignation, the auditors meet on the call of the chairman and audit the accounts of the former incumbent.10 Witnesses; Documents The auditors may issue subpoenas to obtain the attendance of officers and persons whose accounts they are auditing and any persons necessary to examine as witnesses. They may also compel the production of all books, vouchers and papers relative to such accounts. Auditors can administer oaths and affirmations to all persons appearing before them.11 The dockets and records of district justices are to be open to inspection by the auditors.12 Surcharges Any elected or appointed officer whose act or omission, in violation of law or beyond the scope of the officer’s authority, had contributed to the financial loss of the township must be surcharged by the auditors with the amount of such loss. Where the officer’s act or omission results in an unintentional violation of law or abuse of authority, the auditors must limit the amount of the surcharge to the difference between the amount of loss actually incurred by the township and the amount of costs which would have been incurred hat the act been performed in strict accordance with law or authorized procedures. Such limitation on the amount of the surcharge does not apply to cases involving fraud or collusion on the part of the officers.13 Any balance against any officer of the township will constitute a surcharge against the officer as fully as if expressly stated in the report to be a surcharge. Unless appealed, the auditors must direct the clerk of the court of common pleas to certify the amount of every balance or surcharge and the prothonotary must enter it as a judgment against the officer in favor of the township.14 In a case where supervisors contracted for highway work in excess of budgeted and appropriated amounts, the court held the acts occasioned township “financial loss” even though the township suffered no actual pecuniary loss and no fraud or dishonesty on the part of the supervisors was shown.15 In calculating the surcharge, auditors must take into account results of the questioned actions as compared to the results had procedures been followed strictly according to law.16 In another case, township supervisors replaced a full-time township manager with a part-time manager and paid themselves to undertake part of the duties of the township manager. The court held the supervisors must be surcharged because the payments were illegal.The fact that the illegal payments were made in good faith and without fraudulent intent did not relieve them of liability to surcharge.17 However, in another case where the supervisors had acted improperly, but their actions did not result in a financial loss to the township, the surcharges were not sustained by the Commonwealth Court on appeal.18 Another court held that failure to use sound discretion subjected the supervisors to surcharge for the amount of any loss to the township. They had a duty to use sound discretion in making purchases whether they were required by law to advertise or not.19An annual audit showed an excess payment of $88.00 to the supervisors, but there was no evidence to show who had received any excess. The court approved surcharging each supervisor the total amount. Satisfaction of the surcharge against any supervisor discharged the surcharges entered against the others.20 Report; Publication The auditors must complete their audit, settlement, and adjustment prior to March first of each year. They file copies of their report with the secretary of the township, the clerk of court or prothonotary as provided by local rules of court, the Department of Community and Economic Development and the Department of Transportation. Reports filed with the Department of Community and Economic Development should be sent to: Governor’s Center for Local Government Services Department of Community and Economic Development Room 325, Forum Building Harrisburg, PA 17120 Each copy of the report must be signed by at least a majority of the auditors and verified by oath of the secretary of the auditors. The auditors’ report must be made on forms mandated by law and provided by the Department of Community and Economic Development. On or before March 10 of each year, the auditors must publish a concise financial statement in a newspaper of general circulation in the township. In townships with populations of less than two hundred, the auditors may post five copies of the financial statement in public places in the township instead of publishing it in a newspaper. Any township secretary of auditors refusing or wilfully neglecting to file or publish the report commits a summary offense.21 The report of the township auditors is conclusive and can be challenged only by the statutory provision for appeal.22 In the absence of fraud or collusion, the auditors cannot reopen their report after filing.23 The auditors may only settle the accounts for the preceding year. When an account has been regularly settled, an attempted resettlement in a subsequent year is of no validity.24 Where an auditors’ report consisted of a tabulation on a printed form and supplemental material on typewritten sheets apparently intended as a statement of surcharge, the court upheld the report.25 Although the supplement was irregular in form and to some extent inconsistent with the first part, both parts were filed together and intended as a single document. Appeals from Audit The board of supervisors, any registered elector or taxpayer, or any officer whose account is audited may appeal from the audit to the court of common pleas within forty-five days after the settlement has been filed.26 The report of the auditors may be reviewed by the courts only on appeal as provided by the Code.27 Appeal of the auditors report is the exclusive remedy for review of a township officer’s accounts.28 Registered electors, taxpayers and officers appealing a report must post bond to cover costs, if they fail to win a decision more favorable than the report.29 There is no requirement for a bond where the appeal is by the township and has been duly authorized.30 When more than one appeal is taken from a report, they may be consolidated, and the court can frame an issue for trial. After a hearing, the court enters its judgment and assigns costs. Appeals may be taken to higher courts.31 In hearing the case, the accounts of the officer may be investigated again, as if the account had been presented in the first instance.32 The figures of the auditors are assumed to be correct, and the burden of proof is on the officer whose accounts are questioned to prove otherwise.33 Where taxpayers are appealing the audit and asking for a surcharge against an officer against whom the auditors found no balance outstanding, it is the taxpayers, and not the officer questioned, who must bear the burden of proving the auditors report is incorrect.34 Penalties Any auditor who fails to comply with the provisions of the Second Class Township Code commits a summary offense.35 Any auditor who is interested, directly or indirectly, in any township transaction commits a summary offense and shall forfeit his office and shall also pay any financial benefit derived from the transaction to the township.36 Auditors who fail to surcharge township officers are not subject to surcharge themselves on appeal.37 Auditors are not empowered to surcharge themselves, and the court is without power to surcharge an auditor for failure to perform the duties of his office.38 Setting Compensation of Working Supervisors When supervisors are employed as roadmasters, laborers, township secretaries, or treasurers, their compensation is fixed by the board of auditors. The auditors also approve the mileage allowance to be paid to the supervisors for use of their vehicles on township business.39 The term “compensation” is interpreted to include all pay and paid time off including retirement benefits, sick leave and vacations. The rate set should include provision for overtime rates if working overtime is expected. Note that interpretations of the Federal Fair Labor Standards Act (FLSA) exclude township supervisors and all other elected officials from coverage by that law. Thus, while payment of overtime rates may be entirely appropriate in some situations, it is a local choice and not required by federal law. Suggested Worksheet Before beginning this process, the auditors should be familiar with sections 606, 703, 803, and 901 of the Second Class Township Code. The intent of this worksheet is twofold: to help the auditors follow an organized process in setting pay rates for working supervisors, and to help them document the process in case a question should arise. If more room is needed, use as many additional sheets as necessary. 1. List 5-10 major duties of the job: 2. List employers you have contacted about compensation for similar jobs (such as other townships,contractors, or perhaps the PennDOT County Maintenance Office): Name Telephone Date Person Contacted 3. List the two of three positions (by title, not a person’s name) with duties most similar to the work ing supervisor. Note differences in job responsibilities (number of people supervised), skills (such as mechanic or grader operator), and years of experience. List the pay rate plus pension benefits, and paid time off (such as vacation, holidays, sick leave). Pension Benefits Job Title Pay Rate Paid Paid Time Off 4. Agree on a base pay rate based on the above: If other compensation is intended, such as overtime or inclusion in the township retirement plan, the auditors must set these as well: Since compensation for a working supervisor must not exceed compensation paid in the locality for similar services, the auditors may wish to check with nearby employers to compare wages, benefits, and the type of work being performed. The worksheet above may be useful in the process, both in arriving at a reasonable figure and in documenting the process used to do so. Setting and Filing The Treasurer’s Bond Under prior law, the amount of the treasurer’s bond was set by the township auditors. The Second Class Township Code, as amended in 1995, now requires that the board of supervisors set the amount for the treasurer’s bond in an amount equal to the estimated maximum amount to be held by the treasurer at any one time during the year, totaling all accounts. The bond is given with a surety company and is filed with the board of auditors.40 References 1. 53 P.S. 65402; Second Class Township Code, Section 402. 2. 53 P.S. 65404; Second Class Township Code, Section 404. 3. 53 P.S. 65401; Second Class Township Code, Section 401. 4. 53 P.S. 65404; Second Class Township Code, Section 404. 5. 53 P.S. 65407; Second Class Township Code, Section 407. 6. 53 P.S. 65902; Second Class Township Code, Section 902. 7. 53 P.S. 65901; Second Class Township Code, Section 901. 8. 53 P.S. 65906; Second Class Township Code, Section 906; 9. 53 P.S. 65901; Second Class Township Code, Section 901. 10. Ibid. 11. 53 P.S. 65903; Second Class Township Code, Section 903. 12. 53 P.S. 65901; Second Class Township Code, Section 901. 13. 53 P.S. 65907, Second Class Township Code, Section 907 14. Ibid. 15. In re Lilly, 19 A.2d 92, 341 Pa. 171, 1941. 16. In re Bensalem Twp. Auditors’ Report, 7 Bucks 237, 1958. 17. Cotlar v. Warminster Twp., 302 A. 2d 859, 8 Pa. Cmwlth. 163, 1973. 18. In re Report of Audit of South Union Township for 1975, 407 A.2d 906, 47 Pa. Cmwlth. 1, 1979. 19. Appeal from Hazle Twp. Audit, 51 Luz. L. Reg. 207, 1962. 20. Appeal from Audit of Annual Twp. Report of Supervisors of Highland Twp., 8 Chest. 345, 1959. 21. 53 P.S. 65904; Second Class Township Code, Section 904. 22. Brown v. White Deer Township, 27 Pa. 109, 1856; Baughman v. Hempfield Twp., Westmoreland Co., 48 A. 2d 41,159 Pa. Super. 178, 1946; Brady Twp. v. Ashley, 331 A. 2d 585, 17 Pa. Cmwlth. 226, 1975. 23. Auditor’s Report, Lake Twp., 21 Luz. 387, 1921; Appeal of Muhlenberg Twp. Supervisors, 45 Berks 241, 1954. 24. Middletown Twp. v. Miles, 61 Pa. 290, 1897; Com. v. Scanlon, 51 Atl. 986, 202 Pa. 250, 1902. 25. Bensalem Twp., supra. 26. 53 P.S. 65909; Second Class Township Code, Section 909. 27. Com. v. Joyce, 3 Pa. Super. 609, 1897. 28. Festa v. Derry Township, 411 A. 2d 904, 49 Pa. Cmwlth. 297,1980. 29. 53 P.S. 65910; Second Class Township Code, Section 910. 30. South Union Twp., supra. 31. 53 P.S. 65911,65913,65914, Second Class Township Code, Sections 911, 913, and 914. 32. 53 P.S. 65912; Second Class Township Code, Section 912; In re Canton Twp., Washington County, 192 A. 2d 727, 412 Pa. 26, 1963. 33. 53 P.S. 65912; Second Class Township Code, Section 912; Appeal from Hazle Twp. Audit, 50 Luz. L. Reg. 69, 1960. 34. In re 1980 Auditors Report for New Castle Township, 482 A. 2d 287, 84 Pa. Cmwlth. 339, 1984. 35. 53 P.S. 65905; Second Class Township Code, Section 905. 36. 53 P.S. 65916; Second Class Township Code, Section 916. 37. Canton Twp., supra. 38. Appeal of Warminster Twp., 29 D.&C.2d 197, 1964. 39. 53 P.S. 65606,65703; 65803 Second Class Township Code, Sections 606, 703, and 803. 40. 53 P.S. 65702, Second Class Township Code, Section 702. 8. Independent Auditor for Second Class Townships Appointment The township board of supervisors may employ an independent auditor to be appointed by the court of common pleas if a petition has been presented to the supervisors by at least twenty-five taxpayers of the township asking for such appointment.1 After receiving the petition, the court must appoint an auditor, but retains the choice of who is appointed.2 The auditor must be a certified public accountant, a firm of certified public accountants, a competent public accountant or a competent firm of public accountants. The auditor must be appointed at least thirty days prior to the close of the fiscal year. The amount of compensation shall not exceed the maximum allowed to be paid to the board of township auditors for the year, unless an additional amount is approved by the court. The township supervisors may also appoint an independent auditor, without a taxpayers' petition or court approval, by adopting a resolution to replace the elected auditors at their annual organization meeting or anytime thereafter. The supervisors must advertise their intention to replace the elected auditors in a newspaper of general circulation at least thirty days prior to the organization meeting or any later vote to appoint the independent accountant. When appointed by resolution, the township supervisors determine the independent auditor's compensation.3 Powers When an independent auditor is appointed, the township auditors do not audit and settle township accounts, but they still set the compensation of the supervisors. The independent auditors have the powers given the elected auditors under the Code, except for the power to fix the compensation of supervisors. They are subject to the same penalties outlined in the Code for elected auditors and must conduct their audit in accordance with generally accepted auditing standards. The independent auditor's report may be appealed in the same manner as the report of the elected auditors. For purposes of meeting Federal or State audit requirements applicable to programs, grants, and contracts funded by those sources, the supervisors may employ an independent auditor to perform an audit separate from that conducted by the elected auditors. References 1. 53 P.S. 65917; Second Class Township Code, Section 917. 2. Falls Township Board of Supervisors v. Bozzo, 314 A 2d 559, 11 Pa. Cmwlth, 599, 1974. 3. 53 P.S. 65917; Second Class Township Code, Section 917. 9. Auditing Municipal Authorities Status of Authorities Elected borough and township auditors do not audit the books of municipal authorities. Although created by local government units and performing certain governmental functions, authorities are independent public entities created to do specific jobs. Examples of authorities are: water authorities, sewage authorities, parking authorities, school building authorities and transportation authorities. Many are joint authorities including two or more municipalities. Audits Every municipal authority must have its books, accounts and records audited annually by a certified public accountant. If the authority fails to have an annual audit made, then the controller, auditors or accountant designated by the municipality or municipalities may examine the accounts and books of the authority, including its receipts, disbursements, contracts, leases, sinking funds, investments and any other matters relating to its finances, operation and affairs. Such examination is to be at the expense of the authority. The Attorney General has the power to examine the books, accounts and records of any authority.1 Similar provisions for auditing parking authorities are found in the Parking Authority Law.2 Filing; Publication Municipal authorities and parking authorities must file an annual report of their fiscal affairs, including a copy of the audit report, with the Department of Community and Economic Development and with the municipality or municipalities creating the authority. The report must be on forms distributed by the Department of Community and Economic Development. Those authorities whose fiscal year ends December 31 must file by July 1. Authorities whose fiscal year ends on other than December 31 must file within ninety days after the end of their fiscal year. Reports filed with the Department of Community and Economic Development should be sent to: Governor's Center for Local Government Services Department of Community and Economic Development Room 325, Forum Building Harrisburg, PA 17120 A concise financial statement must be published annually at least once in a newspaper of general circulation in the municipality where the principal office of the authority is located.3 References 1. 53 P.S. 310; Municipality Authorities Act, Section 8. 2. 53 P.S. 350; Parking Authority Law, Section 10. 3. 53 P.S. 310, 53 P.S. 350; Municipality Authorities Act, Section 8, Parking Authority Law, Section 10. 10. Auditing Earned Income Taxes Audits Municipalities which levy earned income taxes must provide for an annual examination of the books, accounts and records of the income tax collector by a certified public accountant, a firm of certified public accounts, a competent independent public accountant or a firm of independent public accountants appointed by the municipal governing body. Reports of the audit are sent to the governing body. No further audit is to be performed by elected or appointed auditors.1 Joint Collection Agencies When a single person or agency has been selected to collect earned income taxes for more than one political subdivision, the books, accounts and records of the joint collector are to be audited by a single accountant. The accountant is to be selected by joint agreement of the political subdivisions involved or, in the lack of agreement, on the basis of voting according to the proportion of the population each subdivision bears to the entire population of the combined collection district. A majority of votes determines the appointment.2 Other Act 511 Taxes Collection of all other taxes levied under the authority of the Local Tax Enabling Act, except for the earned income tax, is to be audited by the municipal auditors, controller or appointed auditor.3 References 1. 53 P.S. 6911; Local Tax Enabling Act, Section 11. 2. 53 P.S. 6911,6910; Local Tax Enabling Act, Section 11 and 10. 3. 53 P.S. 6912; Local Tax Enabling Act, Section 12. 11. Advisory Role of Elected Auditors There are differences between professional auditing and the duties of elected auditors. By nature, professional auditing requires the auditor be a person trained in auditing and accounting. An elected municipal auditor is not required to have any training in auditing and accounting. By way of duties, the professional auditor not only examines the financial transactions of the unit, but also has a responsibility to recommend improvements in accounting procedures, internal control devices and related fiscal matters. The elected municipal auditor has no responsibility for the financial welfare of the municipality beyond the settlement of the accounts. Elected auditors are unable to compel installation of adequate accounting methods where they are lacking. They are not required to prepare supporting financial statements nor to adhere to any generally accepted accounting principles. Obviously, this does not imply auditors are powerless in enforcing their findings where corrections are found necessary. The various codes provide that auditors may employ an attorney to assist in settling disagreements. Furthermore, the auditors have the power to surcharge individual officers of the municipality for any balances found due. Auditors also have a power of subpoena to compel the attendance of witnesses and the production of necessary evidence. These powers, properly used, constitute an effective office for insuring the financial affairs of a municipality are carried out in a legal manner. The powers available become less clear, however, with regard to making management recommendations to improve an otherwise legitimate method of operation. We suggest that the elected auditor take an advisory role in the improvement of municipal financial procedures as deemed appropriate. The elected auditors should, however, be reasonably certain that their position is valid since they can at times be personally responsible for the results of their work and recommendations. Any recommendations for operating improvements should therefore be properly developed and checked with knowledgeable municipal personnel prior to making them public. Recommendations and related findings should include: 1. An explanation of the problem that exists. 2. The reason that the existing condition has a negative effect on the operation of the municipality. 3. The reason for the condition existing. This may include explanations provided by the municipality. 4. A discussion of the solutions - good business practice, laws, regulations. 5. Recommendation for operating improvements. It is suggested that any findings and recommendations be submitted in a separate management letter accompanying the Annual Audit and Financial Report. This letter should be addressed to the same parties as the report, should indicate its purpose, and should reference the Annual Audit and Financial Report. 12. Single Audit Act On July 5, 1996, the federal government passed the Single Audit Act Amendments of 1996. The purpose of the Single Audit is to determine and report whether: 1. The government’s entity wide financial statements fairly present its financial position and results of operations in accordance with generally accepted accounting principles (GAAP), including internal controls over financial reporting and compliance with laws and regulations that may have a material effect on those financial statements. 2. The government has established internal control systems to provide reasonable assurance that each major federal award program is managed in compliance with applicable laws and regulations. 3. The government has complied with the laws and regulations that may have a material effect on each major federal award program. Applicability Every state and local government entity that expends $300,000 or more in federal awards in any fiscal year must have a single audit or, when permitted, a program-specific audit. Governments which expend less than $300,000 in federal awards in any fiscal year are exempt from the single audit, as well as other federal audit requirements for that year. These exempt governmental entities, however are still required to maintain records concerning their federal awards and to permit federal agencies, pass-through grantors, and the Comptroller General access to those records. Qualified Auditors Federal Office of Management and Budget Circular A-133 defines auditors qualified to perform single or program-specific audits to generally include Certified Public Accountants and other governmental auditors meeting the independence and professional standards of the US General Accounting Office as issued by the Comptroller General of the United States in a publication entitled GAO Government Auditing Standards (commonly known as “the Yellow Book”). The elected auditor will generally not participate in a Single Audit. But, since the Single Audit includes the traditional audit of a governmental entity, the single audit could be feasibly performed by an independent audit organization working in conjunction with and possibly including the appointed municipal auditor. In any event, the elected or appointed auditor should be aware of situations where a Single Audit should have been performed and should take necessary steps to determine the outcome of that examination. Additional information on the Single Audit requirements and program-specific audits from a the Commonwealth’s perspective can be obtained from: Commonwealth of Pennsylvania, Office of the Budget Comptroller Operations Bureau of Audits Bell Tower - 6th Floor 303 Walnut Street Harrisburg, PA 17101-1830 (717) 783-0114 III. Audit Programs 1. Planning the Audit Importance of Planning To perform a reasonably complete audit, the elected auditors should become familiar with the organization of the municipality to be audited, the officials and employees who keep the records, and the accounting system in use. Then a plan of action should be worked out so that the audit may proceed efficiently. The following suggestions may help. Officials Who Keep the Records Auditors must know both elected and appointed officers and employees involved with municipal finance. Some of the elected and appointed officials of boroughs and townships who may have accounts or records to be audited are: I. Elected Officials Boroughs Townships-1st Class Townships-2nd Class Council Members Commissioners Supervisors Tax Collectors Treasurer Tax Collectors District Justices District Justices District Justices II. Selected Appointed Officials Boroughs Townships-1st Class Townships-2nd-Class Secretary Secretary Secretary-Treasurer Solicitor Solicitor Solicitor Treasurer Appt. Tax Collector Appt. Tax Collector Appt. Tax Collector Police Police Police Manager* Manager* Manager* Roadmaster(s) (district) or Superintendent (entire township) *(if the office is created by council, commissioners or supervisors) The auditors will be primarily concerned with the work of the secretary, treasurer, tax collector and district justices. Since administrative practices vary considerably from municipality to municipality, the auditors must determine which officers and employees have records to be audited. Funds in Use The auditors must determine what funds are in use by a particular borough or township. Since boroughs and townships vary in size and complexity of programs, there are differences in the funds used. (See page two). To determine the number and nature of funds to be audited, the auditors should check with appropriate municipal officials or employees, inspect prior audit reports, including prior Annual Audit and Financial Reports, and approved budgets for the period under examination. Records To Be Made Available to Auditors While various municipalities may use a variety of records, methods of bookkeeping, and accounting methods. The following records are needed for any accounting system and should be made available to the auditors for each fund for the fiscal year under audit. 1. The financial statement(s) of the municipality, if available 2. The general and subsidiary ledgers 3. All records pertaining to cash receipts, such as, documentation and journals. 4. All records pertaining to cash disbursements. 5. Any separate records maintained by the treasurer. 6. All bank statements, cancelled checks, voided checks, duplicate deposit tickets, passbooks and bank charge slips; a list of depositories, their addresses, account numbers, account names and authorized signatures. 7. A schedule of investment transactions for the year. 8. All vouchers together with invoices or bills. 9. The budget for the year under audit as officially adopted and submitted to the Department of Community and Economic Development, together with the municipality’s working budget and all amendments and changes. 10. Periodic financial reports prepared by the treasurer and submitted to meetings of council, commissioners or supervisors. 11. Ordinances and resolutions and official entries in the minutes authorizing transfer between funds, amendments to the budget and similar actions. 12. An organization chart including names of persons in each position. 13. A copy of the municipality’s chart of accounts, accounting policies, and document flow chart. 14. All cancelled bonds and interest coupons or, alternatively, cremation or other destruction certificates. 15. A schedule of all interfund loans or advances. 16. A summary of all litigation involving the local government. 17. Minutes of council, commissioners’ or supervisors’ meetings for the year under audit. 18. Insurance policies covering fire, other casualties, official surety bonds. 19. Records showing inventories of real property, plant and equipment. 20. Copies of appraisal reports by professional appraisers, if any. 21. Records of all outstanding indebtedness such as bank loans and bonded debt. 22. Copies of leases or contracts, if any. 23. Copies of documents in support of advertising and bidding procedures. Tax Collectors’ Reports That Should be Available: 1. Original assessed valuations as certified by the county showing separately the amount of assessed valuations for real estate tax, occupation tax and the number of taxables for per capita tax. 2. Periodic reports submitted by the tax collector to the council, commissioners and supervisors, showing for current period: a. Names of taxpayers making payment b. Amount of taxes collected c. Discounts granted d. Penalties applied 3. Periodic reports pertaining to collections on prior year duplicates. 4. Separate reports pertaining to any Act 511 taxes for which the elected collector is responsible, or for which any appointed collector is responsible, such as the following: a. Real Property Transfer Tax b. Amusement Tax c. Per Capita Tax d. Earned Income (Wage) Tax e. Mercantile/Business Privilege Tax f. Mechanical Devices Tax g. Other Act 511 Taxes 5. Separate reports of any specially appointed collectors of any delinquent or Act 511 taxes. Tax Collection Reports from County Tax Claim Bureau Periodic reports from the county showing delinquent real estate taxes collected plus interest and penalties and minus commissions should exist. Each delinquent year should be shown separately. General Audit Procedures The auditors should follow these general procedures. Following chapters include more detailed auditing procedures. 1. Understand the primary objectives of the audit, which is to determine whether the Annual Audit and Financial Report, Commonwealth of Pennsylvania Department of Community and Economic Development Form DCED-CLGS-30(1-98), is fairly stated, and to determine whether the municipality has complied with applicable laws and regulations. 2. Understand the basic operations of the municipality such as, services provided, number and type of employees, the accounting system, the number and type of funds, and the form of government, and make an assessment of the management’s capabilities. 3. Consider the need for and adequacy of internal controls and the possible effect of them on the conduct of the audit. 4. Review prior years’ financial statements, report and working papers; review minutes, major contracts; discuss audit procedures and their timing with appropriate municipal personnel. 5. Perform a detailed review, test, and evaluation of internal control if the auditor intends to rely upon internal control. 6. Perform substantive tests of accounting records. The auditor may perform substantive testing one fund at a time, or may audit by account type (for instance, cash accounts for all funds or accounts receivable for all funds). 7. If the governmental unit has not prepared the Annual Audit and Financial Report, complete it based upon the information obtained in the examination. The following chapters describe a reasonably detailed audit program for each fund commonly in use by boroughs and townships. The depth to which auditors actually check records may vary depending upon the amount of records involved and the complexity of the financial system. 2. Evaluation of Existing Internal Control Procedures Although elected Pennsylvania municipal auditors have no legal responsibility for guaranteeing the adequacy of internal control procedures or for recommending improvements where adequate controls do not exist, a discussion of the evaluation of internal control procedures is presented for the benefit of those who wish to do more than merely examine and settle the accounts of the municipality. What Is Internal Control? Generally, internal controls involve the way the people and their work are organized, and the methods and procedures they use to safeguard assets and other resources and to ensure that those assets and resources are used as effectively as possible as directed by the governing body and management. Several broad objectives for internal control are included in the definition, including the activities necessary to assure that: – Assets and resources of the municipality are used in accordance with authorizations which may stem from applicable laws, regulations, or actions of the governing body; – Transactions are executed In accordance with authorizations by the governing body and with management directives, and are executed as efficiently and effectively as possible; – All transactions are properly recorded to permit preparation of reliable reports, and to maintain accountability over assets; – Timely and accurate reports of the municipality’s activities are provided to its governing body, tax payers and other agencies which require them. The purpose of the independent auditor’s evaluation of internal accounting controls is to determine their reliability and extent to which auditing procedures are to be restricted. The independent auditor is not obligated by GAAS to review, test, and evaluate internal accounting controls if the auditor does not intend to rely upon them. Note that the standards for audit of the U.S. General Accounting Office do require that internal control be examined, but that the examinations discussed here need not be made in accordance with either U.S. GAO, nor by elected auditors in accordance with GAAS. Characteristics of a Satisfactory System of Internal Control – Segregation of Functions: The control system should minimize incompatible functions. Incompatible functions are those that place any person in a position to both perpetrate and conceal errors or irregularities in the normal course of his duties. – Personnel: Should be adequately trained and supervised. – Execution of Transactions: the system should provide reasonable assurance that transactions are executed as authorized; this requires independent evidence that transactions are executed as authorized, and that authorizations are issued by persons acting within the scope of their authority. – Recording of Transactions: requires that transactions be recorded at the amounts and in the accounting periods in which they were executed and classified in the appropriate accounts. – Access to Assets: should be limited to authorized personnel. – Confirmation of Recorded Balances: Periodically recorded balances of assets should be confirmed by someone other than the person responsible for recording and reporting of the balances. – Management Responsibility: Management should be aware that the establishment of a system of internal control is an important responsibility of management. – Reasonable Assurance: Internal accounting control provides reasonable, but not absolute, assurance that its objectives will be accomplished. Inherent in the concept is that the cost of internal control will not exceed the benefits derived. Following are common and important internal control techniques including application of control procedures to cash receipts, cash disbursements, securities, materials and supplies, plant and equipment. An internal control questionnaire is included in Appendix 2. Internal Control of Cash Custody 1. Bank accounts should be properly authorized. 2. Separate bank accounts should be maintained for each fund or, if not, there should be adequate fund control over pooled cash. 3. There should be fidelity insurance covering those involved with cash. 4. General ledger control should exist over all bank accounts. 5. Responsibility for preparing and approving bank account reconciliations should be segregated from other cash receipt and disbursement functions. Cash Receipts 1. Responsibilities for the collection and deposit preparation functions should be separated from the recording of cash receipts. 2. Responsibilities for cash receipts functions should be separated from cash disbursements. 3. Receipts should be deposited on a timely basis (preferably daily). 4. Receipts should be deposited intact. Receipts should not be used to make change or for petty cash. 5. Incoming mail should be opened by someone, other than the bookkeeper, who lists checks received. 6. Restrictive endorsements should be placed on each incoming check upon receipt. 7. Receipts in person should be controlled by cash register, prenumbered receipts or similar means. 8. Daily reported receipts should be compared to bank statements on a test basis to verify timeliness of deposits. Cash Disbursements 1. To the extent possible, the responsibilities for disbursement preparation, approval, recording and purchasing functions should be separated. 2. Prenumbered checks should be used. 3. Unused checks should be adequately controlled. 4. Check signing machines and signature plates should be controlled with limits on amounts which can be paid using facsimile signatures, two signatures required on checks over certain amount, signature plates under custody of signer when not in use. 5. Voided and spoiled checks should be retained for examination. 6. Checks should not be made to cash or bearer. 7. Invoices and supporting documents should be furnished to check signers prior to signing. They should also be cancelled to prevent reuse. Petty Cash Disbursements 1. Use the so-called imprest system. The fund is set up for a definite fixed amount, for example, $50.00. By drawing checks periodically on the regular bank account in the amount of funds expended, the fund remains at $50 unless it is desired to increase or decrease the size of the fund. 2. Place the fund in the hands of a single custodian who is not involved in handling cash receipts or in keeping the books of account. 3. Expenditures from the fund must be supported by vouchers or receipts written in ink. Each voucher should be labeled with the expenditure account for which the expenditure was made. For example, a postage receipt might be labeled “400.325 General gov’t postage.” 4. The vouchers should be approved by a responsible employe. 5. When the fund needs to be reimbursed, a check is drawn to the order of the custodian for an amount to bring the fund up to the established amount of $50.00. For example, suppose the vouchers covering expenditures made from the fund total $42.85: The check is drawn for $42.85 which, added to $7.15 remaining unspent, will bring the fund up to $50.00. The check is charged to the expenditure accounts shown on the vouchers, in the respective amounts. 6. The vouchers supporting the reimbursement check should be cancelled in order to prevent their use a second time. 7. It is considered a bad practice to cash a check from this fund for the accommodation of an employe or official. It is also undesirable to make advances to an employe or official on his I.O.U. 8. Surprise counts by management of the petty cash, and audits of petty cash vouchers are recommended. Internal Control of Securities 1. Good internal accounting controls over investments include to the extent possible the segregation of: a. Purchasing and evaluating securities from the detailed accounting; b. Custodial duties over security documents from accounting detail; c. Monitoring market values and performance from investment acquisition decisions. 2. The local government unit should have policies and procedures designed to ensure investments are the type required by law; the investment portfolio is checked periodically by persons not involved in investment portfolio management activities; and there are formally established levels of approval required for purchasing or selling investments. 3. Local government units frequently own U.S. government or state government bonds held as part of a sinking fund, as a temporary investment of construction funds, or as collateral security for bank deposits. These securities are usually negotiable and should be kept in a safety deposit box or held for safekeeping by a corporate trustee. 4. If the securities are kept in a safety deposit box, borough council, the board of commissioners or board of supervisors should require at least two persons be present when the box is opened. The governing body should appoint two or more persons who have authority to open the box for clipping interest coupons and removing or adding to the securities. 5. A separate record should be kept showing a description of the security, the denomination, the interest rate and the serial number. For example, U.S. Treasury Bond, 5 1/2%, 1992/98, $1,000 face value, No. 171533. 6. Purchases and sales should be authorized by the governing body. Internal Control of Materials and Supplies If a borough or township keeps a substantial supply of materials on hand to be used in connection with the police, fire, street, health and sanitation or other departments, the following procedures are useful in exercising control over such materials: 1. The materials should be kept in a suitable building, such as a warehouse or garage, with a storekeeper in charge. 2. All purchases should be delivered to the storekeeper who is required to keep perpetual inventory cards showing quantity, unit price and total cost of each item received. 3. All withdrawals for use on borough or township projects should be authorized by written orders or requisitions signed by some responsible official designated to authorize such issues from stock. The requisitions should show quantity, unit price and total cost which must be posted on the perpetual inventory cards. 4. The materials inventory should be insured for an adequate amount. 5. Periodic physical inventories should be taken and compared with the perpetual inventory cards. If differences arise, the perpetual inventory cards must be adjusted. Internal Control of Property, Plant and Equipment A borough or township often owns property and equipment such as office equipment, police cars, radio system, firefighting equipment and trucks, road rollers, scrapers, bulldozers, street cleaning trucks and snowplows. To control such property the municipality should: 1. Maintain a system of plant ledger sheets or other records for each item or class of property to include (a) full description of item showing manufacturer’s serial number, (b) date acquired, (c) cost and (d) where kept. 2. Maintain a record of all insurance policies covering properties and equipment, and review it periodically to assure adequate insurance coverage. 3. Require periodic appraisals by a disinterested appraisal company to determine if there is adequate insurance coverage. 4. Correct plant ledger sheets whenever assets are disposed of by trade-in, sold as used equipment, or sold as junk or scrap. 5. Ensure proceeds from the sale of scrap or junk are recorded as cash receipts. 6. Establish a system to safeguard small tools and repair parts and materials. Other Aspects of Internal Control Other aspects of internal control are contained in the audit programs for various types of revenues, expenditures, payrolls, bond transactions, bank loans and general procedures. May of the desirable elements of an internal control system will be absent in a very small office. This is often not a weakness that can be corrected, but one that the auditor should be aware of during the conduct of the audit. 3. General Fund: Revenues, Receivables, Receipts, Assets These chapters on the general fund audit program will essentially work for every fund type with certain modifications. Subsequent chapters will describe those fund types and any additional audit objectives and procedures specific to them. Purpose of General Fund The General Fund is established to cover the following types of transactions: 1. All general sources of revenue except sources earmarked by law or contractual agreement for other designated funds. 2. Nonrevenue receipts such as temporary loans, refunds, sale of investments, transfers from other funds and other receipts which do not increase the net worth of the municipality. 3. Governmental expenditures incurred to carry on such governmental functions as general administration, protection to persons and property, health and sanitation, and highways or streets. 4. Nongovernmental disbursements such as repayment of indebtedness, refunds, purchase of investments, or transfers to other funds and other expenditures which do not decrease the net worth of the municipality. The General Fund is probably the fund most used by boroughs and townships, and will reflect the major portion of recorded activities and business transactions. The audit of this fund will require a large share of the auditor’s time and effort. The audit program for the General Fund will also provide a general pattern which may be adapted to the audit of other funds. Revenues, Receivables, Receipts Described Following are sources of revenues in boroughs and townships: 1. Taxes-Current Year a. Real estate b. Occupation c. Per capita d. Realty transfer e. Amusement f. Earned income g. Mercantile/business privilege h. Mechanical devices i. Miscellaneous Act 511 Taxes 2. Prior Year Delinquent Taxes Received in Current Year a. Real estate taxes (tax collector-Jan. 1 to April or to earlier date of settlement) b. Real estate taxes (County Tax Claim Bureau) c. Occupation (tax collector-delinquent taxes) d. Per capita (tax collector-delinquent taxes) e. Other delinquent taxes 3. Licenses and Permits a. Beverage b. Building c. Street d. Business and mercantile e. Health and plumbing f. Other 4. Fines, Forfeits and Costs a. Motor vehicle code violations b. Violations of ordinances or statutes 5. Interest and Rents a. Interest on bank balances b. Rent of buildings, property and equipment 6. Intergovernmental Revenues a. From housing authorities in lieu of taxes b. From federal and state governments c. From county as aid for highways 7. Charges for Services (Departmental Earnings) a. Police services b. Parking meters c. Inspection services d. Sewer rents e. Sewer installations f. Street repairs and openings g. Recreational facilities h. Special services (market, cemetery, airport) i. Other departments or services 8. Special assessments and liens (only where project is financed through the General Fund) 9. Miscellaneous Revenue (items not covered in above classification are miscellaneous revenues). Not every borough or township will have all of the revenue receipts. However, each borough or township will have a large number of the types of revenue so classified and the auditors will need to make a careful review of such items. Taxes Collections of real estate taxes, per capita taxes and occupation taxes usually are made by the elected tax collector and turned over to the borough or second class township. In first class townships the elected treasurer serves as the collector. A report is made by the collector to the treasurer showing in running account form the status of the duplicate after each payment. The following information is shown for each tax handled by the tax collector: Amount Date Uncollected balance $ Additions to duplicate $ Penalties added $ Total to be accounted for $ Deductions Discounts allowed $ Exonerations claimed $ Returns to county $ Cash collections $ Total deductions $ Uncollected balance (receivable) on (date) $ Section 10 of the Local Tax Collection Law (1945 P.L. 1050) provides that taxpayers who pay the full amount of their tax within two months after the date of the tax notice are entitled to a discount of two per cent of the amount of the tax. The law also provides that all taxpayers who fail to pay their tax within four months after the date of the tax notice are subject to a penalty of up to 10 per cent. Treatment of discounts and penalties by the tax collector should be carefully reviewed by the auditors. The council, board of commissioners or board of supervisors has authority to exonerate a tax collector from collecting such taxes as are uncollectible because of mistakes, indigent persons, deaths or removals. The tax collector may initiate the claim for exonerations by submitting to the council, board of commissioners or board of supervisors a list showing name, amount of tax and reason why the tax cannot be collected. The auditors must verify approval of all exonerations before allowing the tax collector credit. The taxing body has no authority to initiate exonerations. The real estate transfer tax applies when real property is sold or changes hands. It is collected by the county Recorder of Deeds at the time the deed transfer is recorded. The recorder remits the moneys collected to the borough or township treasurer together with a list of properties sold. The law authorizes the county to withhold two per cent of the amount to cover expenses. The county receives no other compensation for collecting the tax. Other special taxes may be collected by the regular elected tax collector or by a special collector appointed for the purpose. These taxes include the tax on admissions to amusements, wage or earned income tax, mercantile and business privilege tax, and mechanical devices tax. All depend upon the voluntary filing of returns and payment of tax with the return. The enforcement depends upon compiling lists of persons and business or professional firms who should file a return and then making sure returns are filed by all on whom the tax is levied, even though no tax is due in some cases. Delinquent or prior year real estate taxes are collected by the regular elected collector until April 30 of the year following the year of levy unless settlement is made in an earlier month. Accordingly a summary might be set up as follows: Deliquent Real Estate Taxes Balance, January 1, $ Add penalties $ Total $ Deductions: Exonerations $ Returns to county $ Collections $ Total $ Balance, December 31, $ If a balance occurs at the close of the year following the year of levy, there is probably an error or the collector has not turned over all the money collected. The procedure for delinquent per capita and occupation taxes is essentially the same, except they are not turned over to the county for collection. When the tax collector returns the list of delinquent real estate taxes to the county tax claim bureau, the bureau becomes responsible for collection. Returns of real estate taxes are due no later than April 30 of the year following the year of levy. From time to time, the tax claim bureau will send the municipality a check along with a list of persons paying taxes. The amount paid represents the original face value of the real estate tax plus penalty and interest. The municipality should maintain a file of returned taxes and check off the names of payees as the money is received from the county. Licenses and Permits These revenues include: 1. Beverage licenses 2. Building permits 3. Street permits 4. Business and mercantile permits or licenses 5. Plumbing permits 6. Other permits The State Liquor Control Board pays municipalities a share of the liquor and beer license fees which have been collected from licensees in the municipality. Payments are made by the state from the Liquor License Fund on the first day of February and August of each year in accordance with the provisions of the Liquor Code (1951 P.L. 90, Section 801). Of course, if a borough or township has voted to be a “dry” community, no money from this source will be received. Items 2 to 6 are authorized by local ordinances. There should be carbon copies or stubs of the receipts given to the persons taking out such permits, which the auditor should reconcile with the record of cash receipts. The auditors must distinguish between a business or mercantile permit or license and an Act 511 business privilege or mercantile tax. Act 511 business taxes may easily be confused with permit and license fees. The distinction will be found in the authorizing ordinance or resolution. Fines and Forfeits Fines may be either: (1) motor vehicle code violations or (2) violations of ordinances or statutes. These fines must be checked with monthly reports of fines turned over by the district justices. The auditors must also examine the dockets of these officials. Carbon copies of prenumbered receipts issued to the officials for fines turned over to the treasurer should be available for inspection by the auditors. Under the provisions of the Vehicle Code, fines and penalties resulting from State Police enforcement of the Code are paid by the district magistrate to the Department of Revenue and credited to the Motor License Fund. One half of this revenue is then distributed to municipalities according to the same formula used to distribute liquid fuels tax proceeds to municipalities. This formula is based on the municipalities’ population and road mileage. The distribution of funds has no relationship to the State Police arrests which generated the funds. These funds cannot be audited as part of the local auditors’ examination of district magistrates accounts. The funds are, however, audited by the Department of Revenue. One half of all fines and penalties resulting from local police enforcement of the Vehicle Code and all fines and penalties resulting from local police enforcement of parking are paid by the district magistrate to the municipality under which the local police are organized. These funds can be included as part of the local audit. Interest and Rent Interest on bank balances can be verified from (a) the credits allowed by the bank and shown on savings account passbooks or bank statements, or (b) cash or check received from the bank on a certificate of deposit. The auditors should keep in mind the October 11, 1974, opinion by the Attorney General of Pennsylvania that funds may be combined for investment purposes so long as they meet certain procedural requirements. The most important of these is that a clear audit trail must be maintained to prevent money from any particular account or fund from losing its identity perhaps resulting in it not actually being spent for the intended purposes. Interest earnings should be verified by computing the share of each fund of the total investment and checking to insure that the same share of the total interest earning was returned to the proper fund. The audit program for interest income is included with the investment audit program. If rent is received for use of space in a borough or township building, the rental agreement under which such space is rented should be examined by the auditors. For example, the water authority may have offices in the municipal building and pay the borough or township rent for the use of such space. Intergovernmental Revenue The auditors should examine each of these items carefully to make sure the amount is properly recorded and deposited in the bank. It is also important to make sure that items in the General Fund belong there, and not in a special fund. For example, under the Highway Aid Fund Act, boroughs and townships receive grants from the Motor License Fund which must be deposited in a special fund known as the “Highway Aid Fund.” Note that under generally accepted accounting principles (GAAP) for governmental units, grants are to be recorded as revenues when they have been earned, that is, expenditures have been made for eligible project purposes. Prior to that, grants received should be shown as liabilities (advances) rather than revenues. Similarly, if the governmental unit were to expend funds on eligible project purposes prior to receiving grants, then the proper entry would be to charge (debit) a receivable and credit the appropriate grant revenue account. Note also that it is not necessary to prepare the Annual Audit and Financial Report in accordance with GAAP. Charges for Services (Departmental Earnings) Under this classification are grouped receipts for various services and use of facilities. In the financial reports used by boroughs and townships, the following earnings are listed: 1. Police services 2. Parking meters 3. Inspection services 4. Sewer rents 5. Sewer installations 6. Street repairs and openings 7. Recreational facilities 8. Water charges For most of these services the auditors should make sure (a) there is a proper billing procedure and a follow-up to see the bills are paid, (b) receipts are issued to all who make payments and (c) a duplicate or stub of such receipts is kept on file for tracing into the cash receipts book and into the bank as deposits. Special mention needs to be made of parking meter receipts, which usually involve a large amount of small coins. The auditors should critically examine how this cash is handled from the time it is taken from the meter until it is recorded in the cash receipts book and deposited in the bank. Refer also to Chapter 2, Evaluation of Existing Internal Control Procedure. Sewer Rents and Installation Fees The proper auditing procedure for sewer rents and sewer installation charges depends upon which of the following situations exists in the borough or township under audit: 1. The operation and maintenance of the sanitary sewer system may be financed through the General Fund. Under these circumstances the sewer rents and installation charges are properly classified as General Fund receipts. 2. The operation and maintenance of the sanitary sewer system may be financed through a special utility fund called the Sewer Fund. In this situation, the sewer rents and installation charges are classified as receipts of the Sewer Fund. 3. The operation and maintenance of the sanitary sewer system may be financed through a municipal authority called The Borough or Township Sewer Authority. Under this arrangement the sewer rents and installation charges will be receipts of the sewer authority and need not be audited by elected auditors. 4. There may be a sewer authority, but the sewer system could be leased back to the borough or township. The municipality then makes periodic lease rental payments to the authority which uses this revenue to make its debt service payments. If the sewer rents are received by the borough or township treasurer, those receipts and corresponding expenditures must be audited by the borough or township auditors. This audit may be made in addition to an audit made by the authority auditor. Special Assessments The term special assessment is used where local improvements such as paving, curbing or sewer mains, are constructed on a particular street by petition of the owners living on the street and the cost of improvement is assessed against the abutting property owners, usually on a front-foot basis. Only special assessments and liens collected on projects financed through the General Fund will be reported under the revenue receipts of a borough or first class township in its General Fund accounting. The comments made with respect to receipt forms and billing, in connection with departmental earnings apply here as well. The accounting for special assessments and special assessment bonds, is usually handled in a separate Special Assessment Fund which will be considered in a later chapter. Nonrevenue Receipts The sources of nonrevenue receipts of a borough or township are listed in the annual financial report as follows: 1. Borrowed Funds a. Temporary loans b. Sales of bonds 2. Other Nonrevenue Receipts a. Sale of property, supplies and equipment b. Refunds of expenditures c. Transfers from other funds Much of the procedure described in this chapter with respect to the various revenue receipt items applies to these nonrevenue items, with the following additional comments. Sale of Bonds Instructions in the financial report indicate only proceeds of the sale of bonds paid directly into the General Fund should be reported as nonrevenue receipt of the General Fund. Bonds are generally issued for a specific purpose and the proceeds usually go into a special fund to carry out the special purpose. Sale of Property, Supplies and Equipment Where real property, supplies or equipment are sold, the auditors should: 1. Determine the sale has been authorized by the borough council, board of township commissioners or board of supervisors; 2. Examine agreements of sale, invoices or other documents concerning the sale; 3. As certain the agreed price has actually been received, recorded in the books and deposited in the bank. Refunds Receipts classified as refunds include: 1. Refund of money paid out where some error occurred in the billing or some defect was found in the purchased item; 2. Refund of insurance premium because of cancellation of policy; 3. Return of money temporarily advanced to some governmental agency such as an authority. These are generally not considered revenues but rather refunds of expenditure except that refunds of prior years expenditures are placed under Other Financing Sources. Transfers from Other Funds Transfers of money from other funds should be authorized by motion or resolution as required in the appropriate municipal code and may include transfers for the following purposes: 1. If the General Fund wishes to receive money from another fund, a transfer may be authorized. It is unwise, if not illegal, to borrow from a Special Assessment Fund or Sinking Fund, since those funds are definitely earmarked to pay interest and retire bonded debt. To borrow from such funds would defeat the purpose of the fund and would violate the trustee features under which the funds operate. 2. If there is a surplus in a utility or other fund which is needed by the General Fund, a transfer may be made. In auditing transfers, the auditors should look for several items: 1. Are the funds, in fact, unencumbered and otherwise eligible for transfer? 2. Is the transfer approved prior to the actual transaction by appropriate supporting documents such as recorded motions (in boroughs) or adopted resolutions (in townships of the second class)? 3. Is the transfer consistent with the approved budget or with later changes to the budget? Audit Program Starting the Audit 1. Obtain an understanding of the internal control system of the governmental unit. 2. Obtain an understanding of the governmental unit’s organization and key personnel. 3. Request the solicitor for the borough or township under audit to set forth in a letter any legal or other situations which may affect the financial condition of the borough or township. Examples of such matters are: pending litigation and contingent liability. This letter is to be supplied at the close of fieldwork. 4. Secure a letter from borough council, board of commissioners or board of supervisors indicating to the best of their knowledge and belief the financial records reflect all assets, liabilities, receipts and expenditures for the year under audit. Such a letter does not relieve the auditors of their responsibility to make a careful examination, but it does place a burden on the responsible officials to see all financial matters are disclosed in the records and reports. 5. Read minutes of meetings of the governing body. 6. Examine the insurance policies of the governmental entity. 7. Obtain or prepare a trial balance for each fund. a. Determine whether the trial balance accounts are classified in a manner which is compatible with the Report Form. b. If not compatible, the auditor will need to reclassify transactions during the course of the examination to insert figures in the Annual Audit and Financial Report (DCED-CLGS-30). Audit of Cash The objectives of the audit of cash are to determine that: 1. Reported cash balances are correct and belong to the governmental unit. 2. Cash balances presented on the balance sheet represent all cash items. 3. Cash balances are properly classified in the financial reports. Audit Procedures 1. Confirm bank balances as of the balance sheet date for all banks used during the year. A standard bank confirmation form is found at the back of the book. 2. Obtain copies of bank reconciliations for the financial statement date. a. Compare reconciled balances to the balance sheet(s) and ledgers to verify agreement b. Compare reconciled balances to bank confirmations. c. Test clerical accuracy of the reconciliation. d. Trace deposits in transit and outstanding checks to the subsequent bank statement. 3. Obtain or prepare a schedule of cash in savings accounts or certificates of deposit. a. Trace balances to the general ledger. b. Confirm balances as of the balance sheet date (part of confirmation process). c. Examine passbooks and certificates of deposit, compare with confirmations; be alert for unrecorded transactions occurring on or before the balance sheet date, but not recorded in the accounting records. d. Recompute interest earned and trace to related income accounts (Account #341). 4. Prepare a schedule of transfers between bank accounts; include the following information: - Name of disbursing and receiving bank accounts and numbers. - Amounts. - Date disbursed per books and per bank statement. - Date deposited per books and per bank statement. Review the schedule to determine agreement of dates and amounts on the disbursement and deposit sides; investigate uncompleted transactions and determine whether time lags appear reasonable. Petty Cash 5. Identify all petty cash funds, locations, custodians and purpose. 6. Count undeposited cash in the presence of the custodian: a. List coin and currency by denomination. b. List other items, stamps, checks, vouchers; examine date, payee, amount, authorization, account, documentation supporting vouchers. c. Trace the fund balance to the balance per the general ledger. d. List unusual items, such as postdated checks or vouchers prepared in pencil to discuss with appropriate personnel. e. Have the custodian sign a receipt at the conclusion of the count certifying return of the funds. Audit of Investments The objectives of the audit of investments are to determine that: 1. The municipality owns the investments at the balance sheet date and has physical evidence of this. 2. Related income is properly recorded and received. 3. Restrictions, pledges or liens on any of the investments are identified and disclosed. 4. Investments and related income are fairly presented in the financial statements. Audit Procedures: 1. Obtain or prepare an analysis of investments, showing. a. A description of securities held at the beginning of the period including values, maturity dates, interest rates. b. Additions to investments made during the year. c. Sales and dispositions made during the year including sale price,cost,and gain or loss. d. Investments held at the end of the year. e. Investment income earned during the year. 2. Trace ending balances to accounting records and beginning balances to prior year audit report. 3. Inspect securities on hand (in presence of the municipal custodian) and verify agreement with accounting records. a. Note ownership by municipality. b. Obtain a signed receipt from the custodian that the securities were returned by the auditor in good order. 4. Confirm investments held by independent custodians and consider inspecting them. 5. Determine whether approval for purchases and sales are contained in the minutes of the municipality. 6. Trace purchases and sales to cash books and supporting documentation. Revenues, Receivables, Interfund Transfers The objectives of the audit are to obtain assurances that: 1. Revenue accounts include all transactions related to the period. 2. Any related receivables are valid, fairly stated, and the governmental unit has the legal right to collect them. Audit Procedures - Property Taxes: 1. Trace reports of money received, prepared by the tax collector for the treasurer, to the cash receipts journal. 2. Reconcile the ending uncollected balance with the beginning balance, accounting for collections, additions, discounts or penalties of the report period. 3. Compare current years’ assessed value with the prior year, obtain explanations of significant differences. 4. Review the computation of total assessed value for property for mathematical accuracy. 5. Recalculate the tax levy (assessed value multiplied by tax rate). 6. Review delinquent taxes to ascertain whether the penalty has been applied where applicable. 7. Review discounts to determine whether justifiable. 8. Verify approval for exonerations from the governing body of the governmental agency. Audit Procedures - Other Taxes and Income 1. Compare current year revenues with current budget and prior year actual. 2. Review the reasonableness of any levies and test mathematical accuracy. 3. Trace other types of receipts (beer and liquor license fees, building permits) from the source document into the cash receipts journal and bank deposit. 4. Account for the sequential numbering of preprinted forms used for permits and licenses. 5. Examine rental agreements for property rented by the governmental unit to other entities. 6. Analyze ending accounting receivables and consider confirming. Audit Procedures - Grants and Similar Revenues From Other Governments and Quasi-Government Entities 1. Examine documentation transmitting grants to verify authenticity, proper amounts, funds and accounts, as well as possible restrictions on use which could affect accounting. 2. Trace cash grants through the receipts journal and validated bank statement. 3. Trace noncash grants into the accounting records. 4. Analyze ending accounts receivable and consider confirming. 4. The General Fund: Expenditures and Related Liabilities Audit of Governmental Expenditures The expenditures incurred in carrying on the major governmental functions and activities of a borough or township are divided into the following classifications in the annual financial report. General Government 1. Administration 2. Tax collection 3. Municipal buildings Protection to Persons and Property 1. Police protection 2. Fire protection 3. Building regulation, planning and zoning Health and Sanitation 1. Board of health 2. Sanitary sewers 3. Sewage disposal 4. Public comfort stations 5. Solid waste collection and disposal Highways 1. Streets and bridges 2. Street lighting Culture-Recreation 1. Parks and playgrounds 2. Shade trees 3. Libraries 4. Senior centers Special Services 1. Market 2. Cemetery 3. Airport Miscellaneous 1. Insurance (if not distributed to functions cited above) 2. Pensions 3. Other miscellaneous items not classified elsewhere Debt Service 1. Interest on bonds 2. Interest on temporary loans 3. Debt principal Comments on Governmental Expenditures Expenditures is the term used in governmental accounting to describe transactions which either decrease financial resources or increase current liabilities. Expenditures include some, but not necessarily all, cash disbursements. Disbursements for operating the local government, acquiring capital assets or for debt service are considered to be expenditures; however, disbursements to acquire securities for investment purposes would not be considered an expenditure under most circumstances. Also, under an accrual or modified accrual basis of accounting, expenditures will often be recorded in the accounting records prior to a cash disbursement being made. The above outline is condensed and attention is called to additional classifications of expenditures that exist under each governmental function. The classifications include: 1. Classification by character and object — example: Current Expense a. Salaries and wages for personal services b. Contractual services c. Materials and supplies d. Other charges Capital Outlay Fixed assets (land, structures, equipment) 2. Classification by activity — example: Highways a. Snow removal b. Cleaning streets and gutters c. Street lighting d. Street signs and markings The report form filed by auditors is the same for boroughs and townships. It is designed to follow the Chart of Accounts for Pennsylvania Municipalities, which provides a uniform numbering system. The numbering system in the Chart of Accounts is adaptable for use with either single or double entry accounting and may be expanded for those municipalities with more complex needs. The Chart of Accounts is designed for a program budget system. This is a combination of the features of line item budgets and performance budgets. Line item budgets specify the amounts to be spent for each category of purchases regardless of the ultimate use of the purchase (For example, a total amount for gasoline without specifying the amounts needed for administrative vehicles, police vehicles or road maintenance vehicles). Performance budgets, on the other hand, budget money according to the desired result, such as X number of hours of police coverage at a particular cost per hour. The program budget combines these features by designating specific line items in each of several program categories. The actual use of the Chart of Accounts and the design of the budget may vary somewhat from one municipality to another. The important feature for the auditors to consider is the integrity of the system within the municipality and the ability to convert the audited transactions onto the system used in the standardized audit form. Following is a description of procedures governing the expenditure of municipal funds: 1. All expenditures must be approved by the governing body at a public meeting. The secretary may be authorized in advance by resolution to pay certain recurring obligations (such as payroll or utility bills) when received. 2. Reference to bills approved in minutes of meeting - The bill list (if used) should include: date of bill, amount, name of payee, and brief description of what was purchased, if not self-explanatory. Use of a bill list can improve the efficiency of a meeting. 3. Order to treasurer signed by two supervisors in township of second class or president and secretary if borough or township of first class. 4. Treasurer signs check for payment of bill only if sufficient monies are available. Tax Collector’s Bond The bonding of tax collectors is governed by Section 4 of The Local Tax Collection Law. In third class cities and first class townships, the elected treasurer serves as tax collector, but, in boroughs and second class townships the tax collector is an elected official. In both cases, the treasurer or tax collector is charged with collecting taxes for all local taxing units (the municipality, the school district, and in most cases the county). One surety bond must be issued covering all taxes for which the treasurer or tax collector is responsible. The amount of the bond is fixed by the court of common pleas and may not exceed the estimated amount of the duplicates to be delivered to the collector in one year. In some counties the practice is to fix the bond at approximately one third of the tax duplicate. The cost or premium for the bond is prorated among the taxing districts within the jurisdiction of the tax collector or treasurer involved. Verification of bonds must be made at the county clerk’s office and with the insurance agency writing the bond. Audit Procedures - Expenditures and Related Liabilities The objective of the audit is to obtain evidence that expenditures incurred during the period have been identified and properly supported, recorded, and classified in the correct amounts, funds, accounts and accounting periods. Audit Procedures 1. Verify cash disbursements - a. Compare paid checks, cash disbursements journals and invoices or other supporting documents to ascertain agreement of amounts, proper approvals,adequate cancellations and correct fund and account classifications. 2. Determine whether the governmental unit complied with applicable laws for awarding contracts for those tested expenditures requiring such compliance. a. Review bids, contracts, insurance coverage required of contractors, and progress payments. b. Determine whether the expenditures are financed through the General or some other fund such as Bond Fund or Special Assessment Fund. Auditors should review the following code provisions regarding bidding and contracting requiremen