Board of Directors
Fortuna Business Improvement Corporation
Fortuna, California
In planning and performing our audits of the financial statements of the Fortuna Business Improvement Corporation for the years ended June 30, 2021, 2020, 2019, 2018, 2017, and 2016, in accordance with auditing standards generally accepted in the United States of America, we considered Fortuna Business Improvement Corporation's internal control over financial reporting (internal control) as a basis for designing auditing procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness .. of the corporation's internal control.
Accordingly, we do not express an opinion on the effe6~iveness of the corporation's internal control. · ·
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Our consideration of internal control was for the .Jiµiited purpose described in the preceding paragraph and was not designed to identify ,all defidencies in internal control that might be material wealmesses or significant deficiencies' anq, therefore, material weaknesses or significant deficiencies may exist that were not ide~tifi~d:'. However, as discussed below, we identified certain deficiencies in internal control th~t we \consider to be material wealmesses and other deficiencies that we consider to bi:l sig~ifi6arit deficiencies. ;-- , '\ . '.',
A deficiency in internal controre:l(ists }h;n the design or operation of a control does not allow management or employees, in the'·pormal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A material wealmess is a deficiency or a combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the corporation's financial statements will not be prevented, or detected and corrected, on a timely basis. We consider the following deficiencies in the Corporation's internal control to be a material wealmess.
Material Weaknesses:
A. Core Area Accounting
The three Core areas, Downtown Merchants, Strongs Creek and Redwood Village are supposed to receive 62% of the assessments paid by those areas. In the past, there was an overpayment to the Core Areas caused by over reimbursement as the corporation had not allocated 3 8% to Citywide. This was shown as a restricted deficit in net assets by core area. The previous auditor recommended the Corporation prepare a schedule showing the additions and subtractions to each zone. Our findings during this audit of six years shows that even if this schedule continues, there is no system or agreement in place to return these overpayments. The finite amount of assessments are spent annually, whether on the core areas, citywide or operating expenses.
Board of Directors
Fortuna Business Improvement Corporation
Recommendation:
It appears each core area has different ways they are reimbursed. We suggest Downtown Merchants submit invoices from the current year for the current year assessments. We noticed that the invoices being submitted for payments are two years old. Redwood Village has no contact person and no bank account. The method of paying out the assessments to them are by directly paying invoices for the Al Gray Parade in December. Strongs Creek generally provided a list of checks and amounts without invoices with requests for payment.
We were surprised that FBID personnel were on the bank accounts for these core areas. It appears that these areas are separate associations which have one Board member appointed to represent them. We suggest the Corporation maintain a schedule of assessments due to each area and disbursements provided to each area. At the end of the fiscal year, the Corporation should reconcile and submit the remainder of assessments due to the Core areas. The method used now varies between the areas and is overly complex, when the Corporation should just provide the 62% of assessments to these areas unless there is any re(l,s6n this is not acceptable, perhaps the Board can work with each Core area and find a simpleqnethod of reimbursement.
We ' have updated the schedule for the past six <_Year~ and can provide a schedule of actual assessments ( 62%) less expenditures for each of thos6 years under audit. During our audit we found some of the assessments were not a!li;,cated i:qrrectly, many of the invoices were not available for review, and certain expens~s were,not coded correctly. The actual balances in the Core areas may not be accurate. ) \
B. Segregation of Duties ;-
When designing a system of liiternal) controls, it is prudent to separate the recordkeeping function, custody of assets, and authdrization function whenever feasible. We found that Fortuna Business Improvement Corporation had a total lack of internal controls in place. Because of the limited number of employees, one person, the executive director and coordinator, was primarily responsible for data entry and maintaining the Corporation's general ledger accounting records.
She had use of a debit card for the banks, signed checks, and processed her own payroll checks.
We found this employee had access to over-the-counter withdrawals from the bank and transferred funds between the operating account and the gift certificate accounts for cash flow purposes. These represented loans to cover expenses while waiting for the next assessment check.
Generally, when there are limited personnel, the Board of Directors can mitigate this lack of segregation of duties by performing the bank reconciliations and approving and signing accounts payable checks. The Board of Fortuna Business Improvement Corporation did not fully understand what their position and duties were. The Board was responsible for setting policy and direction for the executive director as well as providing oversight and monitoring of the executive director's performance. From the minutes, it was cleai· that the executive director, set the agendas, and prepai·ed the minutes. Her payroll checks were signed by a Board member, but there was no questioning or review of the checks being signed.
Board of Directors
Fortuna Business Improvement Corporation
Page3
Placing the management functions and accounting functions on one person increases the risk that omissions and errors will go undetected. The Board was not presented with the financials per the minutes, because the director said they needed to be cleaned up first. Many errors were found during the six-year audit which indicates a complete lack of controls in place to prevent and detect errors. The executive director lacked certain bookkeeping and accounting skills, and, in our judgment, her time would have been better utiliz.ed in the overall management of the daily activities and pursuit of organizational goals.
We understand that beginning in July 2021, a third-party bookkeeping company has been engaged to do the accounting for the Corporation.
C. Gift Certificate Bank
Over the years, the Fortuna Bucks account was never reconciled by certificate making it impossible to know exactly how many certificates are outstanding. We found during these years; the bank account was reconciled by netting the sale of certificates to the certificates that were used. This netted figure was posted to the Certificate Jl;bility account causing the liability account to be overstated. · \,.
The previous auditor recognized income and expe_pse .. :-We adjusted the liability account by the amount that was recognized as income during thf 2015 audit. As of January 2021, the corporation no longer sells Fortuna Buck certificat(es.''Jhe bank will remain open to offset any submitted certificates and the liability accounf;\\1111 be closed to income at a future date. We believe the liability account is more reason!!bly stated with our adjustment. ,.· ,,, ) ·, _,,.-
All transfers have been returned to the Gift Certificate bank account. . \ --~- D. Accounts Payable
There are no closing procedures performed to capture unbilled expenses or to accrue payables at year end. This includes the reconciling of the Core area zones to enable the Corporation to report all reimbursements on a fiscal year basis.
E. Certain Fundraising Activities
During 2016, 2017 and 2018, the corporation took on a major fundraising Ice Rink rental activity. For the first year, there were more people involved and the budget was reasonably close to the actual expenses. The following two years, poor recordkeeping and a corrupt QuickBooks file hampered the ability of the auditor to compile sufficient evidence that all cash transactions were accounted for or to determine if any cash controls were in place. Using the separate bank account as a control document, the auditor was able to obtain a reasonable basis for the audited amounts presented. In the final year, the files were apparently turned over to another organization to manage the rink activity. Those records were not available.
Board of Directors
Fortuna Business Improvement Corporation
During 2017 and 2018, the Corporation took on further fundraising events with the Redwood Comedy Fest. These events were not budgeted, and the auditor did not have sufficient evidence to confirm that the recorded revenues or expenses were reflected properly or in whole. Much of these activities were operated on a cash basis. The records did not indicate how many tickets were sold, or how many people attended, or what controls were in place to ensure all cash was accounted for. Many of the direct bank expenses did not include receipts. Fortuna Business Improvement Corporation paid for the comedians' flights, hotels and paid the comedians in cash for their performance.
The comparison between these events showed that both 2017 and 2018 fundraising resulted in losses.
A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the following deficiencies in. the corporation's internal control to be significant deficiencies:
Significant Deficiencies:
F. Assessments and City Matching Revenues '
The City assessments were not reconcited to t)le corporation's general ledger. As mentioned earlier, the allocation between revenu~ acco;unts·1md Core Areas was not recorded correctly. In addition to these corrections, the norwitl accrual of the final payment made in July for the previous fiscal year was not recorded a~ ·b~e from City. While these adjustments are minor, the receivable balances each year were incol)"ect.
We recommend reconciling the payments received from the City to the City ledger and correcting for the 62% calculated for the Core areas and the 3 8% to Citywide revenue account.
G. Bank Accounts Not on General Ledger
The Ice Rink account held at Redwood Capital Bank was the separate account which needed to be reflected in the Corporation's books. However, there was apparently a credit card bank account at U. S. Bank in FBID's name which was opened in April 2018 and closed in 2020.
Although the balances were under one thousand at June 2018, 2019, and 2020, this account was also used by other organizations such as Rotary.
Follow up shows the account is closed and remaining funds of $550 were transferred to the Corporation's operating account.
Board of Directors
Fortuna Business Improvement Corporation
H. Functional Expense Allocations
In the previous audits performed, the administrative costs were compiled, and management designated the hours related to all activities to calculate the allocation of these costs to each activity and specific functions. This was an estimate which was time consuming. During this six year audit the executive director was no longer employed, and given the late nature of the audit, management agreed that the allocation presented was reasonable and less convoluted.
We recommend that the Corporation develop a reasonable and consistent method of allocating administrative costs for the annual reporting and disclosures of functional expenses between program services and supporting services.
I. Reporting Revenues Separate from Expenses
Certain activities have sponsorship donations or tickets sales which should not be netted with the expenses incurred for these activities. Not only are the financials more relevant and understandable; the revenues are not understated and sllould,_be reported at gross.
J. Payroll Issues
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During our audit we encountered multiple com;ems wit:4 payroll policies and issues. ' ~ ' ' \ _.i
1. It is advisable that the exe~µtive)director does not issue their own payroll checks; it is also advisable that the directotJirovide a timecard or explanation of duties performed and time expended '.';!,payrqQ ·dpcumentation. •.\ • ' V .,, . I
2. We suggest either having a :written agreement or employment contract which outlines the duties, responsibilitie11/and obligations of each party.
3. Employee cash advances should be discontinued or limited with concrete terms for repayment of such, preferably through subsequent payroll deductions.
4. Benefits such as health stipends should be paid through periodic payroll not in lump sum payments.
5. The executive director often paid herself in advance of working. For example, in March 2020, six payroll checks cleared the bank, meaning she was prepaid for two months. Because of quarterly payroll taxes, the Corporation had to pay taxes three months in advance for the April and May prepaid payroll. When interviewed, the former director said because of Covid she was not able to obtain a Board signature.
However, this does not explain why the checks were not dated as of the period for which they were intended.
Board of Directors
Fortuna Business Improvement Corporation
6. Lacking concrete policies and procedures has caused inconsistencies in benefits provided by the corporation to its employees. The former director, when asked how the interns were receiving vacation and holiday pay, when this was not part of their stated benefits, replied that she was authorized to do whatever steps necessary to retain her employees, even though this was not included in the budget.
7. Employment pay and benefits for each year should be clearly documented going forward so that the parties do not have to reconstruct past practices with respect to bonuses, sick leave, and vacation pay.
8. During the audit, several EDD envelops were found unopened. Several payroll tax notices were received. This alone is a major red flag as it represents late tax filing and penalties and interest. Some payroll tax reports were not found in the files.
K. Other Concerns and Findings
I. Bank check numbering sequences were out of order.
2. One ' instance of a check date being changeq, orf'!l check that cleared the bank in Sept 2018, the audit trail showed the date changed to 7/I/19. Unknown reason provided.
3. There were multiple voids and deletes ,Clfi th~,QuickBooks file.
4. Found an unopened envelop in the Ice Rink 2016 file containing $85.00 from Trinity _,-. ,0 School students. \1 - •-- -_ <·,_,
5. Costco card membership shoqld beln_,i'otporation's name rather than director's name as the corporation would bpriefit\froni;the cash back provision annually.
6. Due to/from Rotary was not ctear why the exchange students' dinners and telephones were paid by FBID a9d char~bQ back to Rotary.
7. In three out of six yeiµ:s, Workers Comp insurance was cancelled and reinstated.
8. Vendors should not be paid,.'fo cash. Ex. Pony rides at AI Gray Lighted parade and Comedians at Comedy Fest events.
9. Possible Sales tax should have been filed for miscellaneous sales at Ice rink events.
10. Possible 1099 NECs should have been issued to visiting Comedians at Comedy Fest events.
11. Each year late invoices for advertising should be accrued to capture all expenses for that fiscal year.
12. Horizon invoices were paid from statements and invoices causing duplicate payments for the same invoices.
13. On the QuickBooks file, Downtown Merchants and Fortuna Downtown Merchants both listed as vendors. Strongs Creek listed as vendor and Job. It is advised that only one name be entered for Vendors.
14. For three years, the Corporation was loaned money from a Board member to cover cash flow problems the first quarter of each year. This is indicative of poor budgeting and related party issues.
15. Upon receipt of the FBID QuickBooks accounting file, it was clear that the 2015 audit journal entries had not been recorded. As the audit was not completed until October 31, 2020, it is understandable that the tax preparer did not notice. By accepting the audit, the corporation should have recorded the auditor's journal entries.
Board of Directors
Fortuna Business Improvement Corporation
16. Even though the City requires an annual audit, the corporation has not adhered to this requirement. We suggest that the Board consider an annual audit with no gaps of assurance on the financial statements. This would substantially increase the overall review and assessment of internal controls and other such matters of operating efficiencies, as well as provide the Board with timely financial statements. ****************************************************************************** In addition, we noted other matters involving the internal control and its operation that we have reported to management of Fortuna Business Improvement Corporation in a separate letter dated December 21, 2021.
This communication is intended solely for the information and use of management, the Board of Directors, and others within the organization, and is not intended to be and should not be used by anyone other than these specified parties. . ,
December 21, 2021
Fortuna, California
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Anderson, LricJts, Somerville & Borges