YMCA audit shows progress; includes recommendations for improvements

The board of the Ponca City YMCA received an audit report at its June 21 meeting from Kim Mayer, CPA, P.C. Mayer specializes in auditing non-profit organizations.

The audit Mayer performed was for the year ended Dec. 31, 2017, and included a letter outlining matters Mayer said she considered reportable conditions under standards established by the American Institute of Certified Public Accountants.

She explained reportable conditions involve significant deficiencies in the design or operation of internal controls that could adversely affect the YMCA’s ability to initiate, record, process and report financial data consistent with the assertions of management in the financial statements.

A material weakness, she said, is a reportable condition in which the internal control components do not significantly reduce the risk that errors or fraud may occur without being detected in a timely period by employees in the normal course of performing their assigned functions.

Mayer cited particular material weaknesses in her letter:

Internal Controls
Findings:
During the first half of 2017, there was an absence of internal controls, an inadequate segregation of duties, and a lack of supervisory approval.
Cause:
Management and/or employees lacked the qualifications and training to fulfill their assigned accounting functions. The individuals responsible for the accounting and financial reporting lacked the skills and knowledge needed to accurately report the financial condition of the YMCA.
Effects:
For the first half of 2017, there were no accurate financial statements presented to the board to enable them to make informed decisions concerning the YMCA’s financial health.
Recommendations:
One of the responsibilities of the board of directors is to ensure that the financial resources of the YMCA are effectively managed sufficiently to assure the Y has a sustainable future. In mid 2017, an accounting firm was hired to record and prepare the financial statements that management and the board of directors can use to assess the financial resources and needs of the association. Mayer encouraged the board to continue those services.

One of the findings, Mayer said, was that in the first half of 2017, the bank reconciliations were not performed in a timely manner. On Dec. 31, 2017, she said, there were approximately $11,000 of old outstanding checks that were listed on the bank reconciliation.
Without an accurate cash balance, the board could not properly analyze the cash flow needs of the YMCA. Mayer said the bank reconciliations need to be prepared on a regular basis to ensure an accurate cash balance.

Mayer said the outside accountant has reconciled all bank accounts and again encouraged the board to continue using an outside accountant and that all old outstanding checks are investigated and corrected, reissued or voided.

She also wrote that documentation was missing. During field work on the audit, she said a list of invoices to vouch was submitted. She found that 25 percent of the invoices could not be located.
She advised the board that if supporting documentation was not maintained, there is a risk that unauthorized disbursements could be made.

Mayer recommended that all expenditures should have supporting documentation and that it be reviewed at the time the check is signed.

Prior Year Findings

Mayer advised the board of several troublesome findings in prior years. One issue involved a Garden Grant which was to be used for a specific purpose. Those grant funds were not accounted for or reported accurately, she said, and a portion of those funds were not used for its restricted purpose. The grantor was contacted and gave permission to divert the funds not used for the garden to general operations.
A credit card with a large balance was found and there was no evidence the Board of Directors were aware of the card and balance, and it had not been recorded in the financial statements. The balance on the credit card was paid in full on Aug. 2, 2017, and the account was closed.
The Ponca City Utility Authority bills for October, November and December 2016 were not paid and the amount owed was understated in the financial statements due to errors. All utility bills for 2016 have been paid. All utility bills for 2017 and through May 2018 have been paid. Penalties of $6,021 were paid.
The 2016 W-2s and 1096s were not submitted to the Oklahoma Tax Commission and/or the IRS as required. There were W-2s that had not been distributed to employees. All reporting forms for 2016 have been submitted as required.
There was a discrepancy in a check written to Cybex and no supporting documentation could be found. The YMCA located the missing invoices to support the Cybex check.
The YMCA addressed the accounting and financial statement issues and some of the internal control concerns by hiring an outside accountant to record the transactions and prepare the financial statements. The accountant also reconciles and keeps track of the bank accounts.
The Capital Reserve requirement for 2017 was 2.5 percent of the monthly gross income, which was $26,304. The first 10 months’ requirement was transferred to the capital reserve account on Dec. 13, 2017, and the requirement for November and December 2017 was transferred on Feb. 15, 2018. The balance of the Capital Reserve account on Dec. 31, 2017, was $63,904 and on May 31, 2018, was $23,680.
The Association is currently using Paycom to process the payroll, taxes and payroll reports.

Among the recommendations Mayer proposed as a result of the 2017 audit were:

Establishing a capitalization policy that contains guidelines on how assets are currently valued, reported and documented. The policy should provide guidelines on expenditures that qualify for capitalization or that should be expensed.
FASB AU 2016-14 will be effective for 2018 which amends the nonprofit financial statement presentation which will require a statement of functional expenses and a discription of all allocations methods. To meet this requirement for the Dec. 31, 2018, audit, the YMCA should develop specific allocation methods for its indirect costs associated with its various programs, management and expenses.
During 2017, the YMCA used the modified cash basis of accounting. While this is an acceptable basis of accounting, this bases can create a large variance between reporting periods because of the timing of when certain expenses are paid. This variance occurred between 2016 and 2017 in the utilities expense accounts. The October and November utility expenses in 2016 were paid in January 2017, which caused the utility expense account to be understated for 2016 and overstated for 2017. In 2018, the outside accountant began using the accrual basis of accounting which better matches the revenues with the related expenses in the same period and creates a more complete view of financial conditions.

Mayer said that in 2017, the YMCA implemented several positive and operational changes.

“As a result of these changes, the board has access to more accurate financial statements to monitor the operating results and cash flow needs,” Mayer wrote.

“The Association is struggling to meet its current operating needs without borrowing additional funds,” she wrote. “With the current financial situation, the Association does not have the ability to make principle payments on its debt.
“The board and management need to prepare an extensive review of the Association’s revenues and expenses and create a financial plan to generate cash, either by increasing revenues or decreasing expenses, or both,” Mayer wrote. “Cash flow also needs to be monitored on a regular basis. A long-term plan needs to be implemented to build the Association’s financial strength.”

In the actual audit prepared by Mayer on Dec. 31, 2017:

ASSETS:
Operating accounts: $20,361
Capital reserve account: $63,904
Total cash and cash equivalents: $64,265

Property and equipment: $1,671,317
Total assets: $1,755,582

LIABILITIES AND NET ASSETS:
Line of credit $550,000

Net assets:
Unrestricted:
Undesignated: $1,141,678
Designated for
capital expenses: $63,904
Temporarily
restricted:
Permanently
restricted
Total Net Assets: $1,205,582
Total liabilities and net assets: $1,755,582

To see the entire audit document, contact the Ponca City City Clerk’s Office in City Hall.