This section of our report summarizes the results of our operational audit of the City of Mexico Beach, Florida, for the period October 1, 2001, through March 31, 2003, and selected actions taken prior and subsequent thereto.

General Management Controls

Finding No. 1: During the majority of the audit period, the City had not established written policies and procedures necessary to assure efficient and effective conduct of accounting and other business-related functions and the safeguarding of assets. Although the City Council, in March 2003, adopted standard operating policies and procedures addressing most critical areas of City operations, these policies and procedures do not address certain instances of noncompliance and management control deficiencies disclosed by our audit.

Finding No. 2: The City had not provided for an adequate separation of duties, or established compensating controls, in certain areas of its business operation.

Budgetary Controls

Finding No. 3: The City, for the 2001-2002 and 2002-2003 fiscal year budgets, did not include beginning fund equities available from the prior year for the General Fund, and did not amend the budgets to show actual beginning fund equity balances for the enterprise funds.

Finding No. 4: Contrary to Section 166.241(3), Florida Statutes, actual 2001-2002 fiscal year expenditures exceeded amounts budgeted for certain expenditure object categories for the General Fund and enterprise funds, and exceeded total budgeted expenditures for the General Fund.

Cash in Bank

Finding No. 5: Certain City bank accounts were not properly and promptly reconciled during the audit period.

Finding No. 6: Accountability for checks for the City’s General Fund bank account was deficient in that void checks were not properly defaced and proper accountability was not maintained for all voided checks.

Investments

Finding No. 7: City investments in repurchase agreements were not authorized by Section 218.415, Florida Statutes, or the City’s investment policy. In addition, the City’s investment policy does not contain all of the required elements prescribed by Section 218.415, Florida Statutes.

Finding No. 8: The City could have earned additional interest income of approximately $7,200 by investing with the Florida State Board of Administration.

Fixed Assets

Finding No. 9: The City had not established general ledger control accounts for its classes of fixed assets for the General Fixed Assets Account Group. In addition, the City did not maintain adequate subsidiary records for tangible personal property.

Finding No. 10: The City had not, of record, performed a physical inventory of its tangible personal property since some time prior to July 2001 until it performed a physical inventory in March 2003. At the time of our inquiry in August 2003, the City had not, of record, reconciled the physical inventory to the fixed asset records to determine whether differences existed between actual and recorded property.

Finding No. 11: Several surplus property items disposed of during the audit period were not, of record, disposed of in the manner authorized by the City Council. In addition, documentation supporting the sale of several items was not sufficiently detailed and, as such, we could not determine whether the appropriate amount was collected for these items.

Finding No. 12: The City, in selling several impounded or abandoned vehicles, did not comply with Section 705.103, Florida Statutes. In addition, except for one vehicle, amounts received for the sale of these items were not adequately documented through the use of individual receipts and, as such, we could not determine to whom the vehicles were sold and the amounts for which they were sold. In addition, one of the vehicles remains titled in the City’s name, exposing the City to possible liability should individuals using the vehicle suffer or cause injury or death.

Long-Term Debt

Finding No. 13: The City, as part of its efforts to obtain financing to refund certain outstanding debt obligations of the City, and to acquire and construct capital improvements for the City’s wastewater utility system, obtained financing from various sources, including a $4,190,000 loan from the City of Gulf Breeze. Our review of the City’s debt management decisions with regard to these efforts disclosed that the City may have incurred unnecessary financing costs. It was not apparent, of record, why the City borrowed $4,190,000 from the City of Gulf Breeze, since this amount exceeded its documented financing needs by $1,450,424. In addition, it was not apparent, of record, why the City, after it was determined that not all of the loan proceeds would be needed for originally intended purposes, did not promptly pay off some of the principal balance due on the Gulf Breeze loan or pay off other outstanding debts. Further, the variable rate Gulf Breeze loan, and another variable rate loan used to pay closing costs on the Gulf Breeze loan, together comprised 42 percent of the City’s total long-term debt at September 30, 2002, which is well in excess of recommended variable rate limits.

Finding No. 14: Ordinance No. 338, and the City’s loan agreement with the City of Gulf Breeze, provide that loan proceeds may be used to finance or refinance projects other than those specified in the loan agreement if the City obtains a favorable opinion of bond counsel. Based on documentation provided by the City, we determined that the City used approximately $1.5 million of the Gulf Breeze loan proceeds for purposes not authorized by Ordinance No. 338 and the loan agreement without obtaining prior City Council and bond counsel approval.

Finding No. 15: A liability associated with a State Revolving Fund loans obtained by Bay County on the City’s behalf was not reported on the City’s financial statements or otherwise disclosed in the notes to the financial statements for the fiscal years ended September 30, 1999, 2000, 2001, and 2002.

Restricted Resources

Finding No. 16: Contrary to 218.33(2), Florida Statutes, the City did not separately account for donations in accordance with the Florida Department of Financial Services’ Uniform Accounting System Manual.

Finding No. 17: The City did not timely request reimbursement for a $150,000 expenditure incurred under a grant agreement.

Cash Controls and Administration

Finding No. 18: The City had not established adequate controls to assure that dockage fees were properly collected and remitted to the City.

Finding No. 19: Prenumbered documents were not used to account for fees collected for fence, sign, and driveway permits.

Revenues and Other Receipts

Finding No. 20: The City did not assess late fees in the manner required by City ordinances. During the audit period, the City potentially failed to assess and collect $5,628 in late charges related to water and sewer services, and improperly assessed an estimated $4,322 of late charges related to sanitation services.

Personnel and Payroll Administration

Finding No. 21: Our review of personnel records of 12 employees hired between June 2001 and March 2003 disclosed several instances in which the City had not, of record, obtained complete applications, verified application information, or contacted previous employers or references listed in the application.

Finding No. 22: Contrary to City Ordinance No. 431, the Director of Public Works supervised his brother-in-law.

Finding No. 23: Contrary to the Internal Revenue Code, the City classified City Council members as independent contractors rather than as employees and, as such, no employment taxes were withheld or paid on their compensation. As a result, the City could be liable for unpaid employment taxes.

Finding No. 24: Contrary to United States Treasury Regulations, the City did not include certain fringe benefits provided to employees in the employees’ Forms W-2, Wage and Tax Statements.

Procurement of Goods and Services

Finding No. 25: Our audit disclosed expenditures totaling $8,529 for which the City’s records did not clearly document that a public, rather than a private, purpose was primarily served. Of this amount, City employees repaid $1,878.

Finding No. 26: Deficiencies in the City’s disbursement processing procedures consisted of failure to use purchase requisitions or purchase orders, and a lack of signatures and dates evidencing the receipt, inspection, and approval of goods and services.

Finding No. 27: Contrary to City Ordinances, purchases of goods and services totaling $69,482 were not competitively bid or appropriately approved by the City Council. In addition, it was not apparent, of record, why newspaper advertisements were not used to solicit vendors for these purchases.

Contractual Services

Finding No. 28: Contrary to State law, City Ordinances, or good business practices, the City acquired certain contractual services without using a competitive selection process and, in some instances, without benefit of formal written agreements. In addition, invoices submitted by a firm that provided accounting and auditing services were not in sufficient detail to allow a determination as to whether fees charged, and expenses submitted for reimbursement, were appropriate.

Travel Expenses

Finding No. 29: The City had not, of record, documented in the manner required by Section 112.061, Florida Statutes, the reasonableness of a $375 monthly travel allowance approved for the City Administrator.

Finding No. 30: For several travel advances paid to employees, the City records did not demonstrate that the travel actually took place and that the actual expenses were at least as much as those anticipated on the travel advance request. In addition, some travel expense payments were not consistent with Section 112.061, Florida Statutes, or good business practices.

Vehicle Usage

Finding No. 31: The City, for vehicles assigned to employees on a 24-hour basis, did not require maintenance of vehicle usage logs to demonstrate that the vehicles were used primarily for a public purpose, and used only incidentally for the personal benefit of the employees, and to provide a means for determining the value of personal usage to be included in the employees’ gross income reported to the Internal Revenue Service.

Volunteer Fire Department

Finding No. 32: Contrary to generally accepted accounting principles, the City’s Volunteer Fire Department, a nonprofit corporation, and a component unit of the City, was not reported in the City’s audited financial statements for the fiscal years ended September 30, 2000, 2001, and 2002.

Finding No. 33: Although Attorney General opinions indicate that organizations such as the City’s Volunteer Fire Department (i.e., private entities created by public agencies and acting on behalf of public agencies in the performance of their public duties) are subject to the Sunshine Law (Section 286.011, Florida Statutes), meetings of the City’s Volunteer Fire Department were not advertised or other public notice given.

Finding No. 34: The City’s Volunteer Fire Department had not implemented adequate controls over donations received.

Other Matters

Finding No. 35: The City, from December 1997 to May 1999, issued $25,815,000 in bonds, the proceeds of which were to be loaned to nonprofit corporations to finance the cost of the acquisition, renovation, construction, and equipping of public service facilities in the State of Florida. Our audit disclosed certain deficiencies regarding the City’s oversight and administration of these bond issues.

Finding No. 36: In July 2003, the City Council approved a letter of understanding between the City and a development corporation (Corporation) that provides for the City to improve and use approximately 5 acres of the Corporation’s property for a period of no greater than two years, and for all improvements to the property, upon termination of the two-year period, to be owned by the Corporation. The City subsequently entered into a renewable two-year lease with the Corporation for use of the property at a rate of $1 a year, and the lease requires that an easement be granted to the City before use of the property can begin. Although we were advised that the Corporation has not granted an easement to the City, improvements had already been made to the property, and a total of at least $125,000 of improvements to the property were planned. The City had not demonstrated, of record, that this arrangement was the most economically viable option.

Finding No. 37: Regarding the City of Mexico Beach Beautification Project, a nonprofit organization formed to accept donations for "Tom Sawyer Day" (an event held each March in which participants donate their time in beautifying the City’s parks), our audit disclosed several factors indicating that individuals that made contributions for Tom Sawyer Day may have believed it was the City to which they were making contributions.

Finding No. 38: The minutes for several City Council meetings were not timely approved; one meeting was not properly noticed; and one meeting was not held within the City’s jurisdiction in a place that was readily accessible by the public.