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Spearfish accepts 2017 audited financial statements

September 23, 2018

SPEARFISH — The Spearfish City Council Monday accepted the 2017 audited financial statements prepared by Ketel Thorstenson, LLP.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information for the city, and this audit covered Jan. 1 through Dec. 31, 2017. The auditors also evaluate the appropriateness of accounting policies used and how reasonable estimates made by management are, and the auditors also evaluate the overall presentation of the financial statements, the draft of the independent auditor’s report states.

Traci Hanson, of Ketel Thorstenson, LLP, presented the draft report to the council.

“From an overall results standpoint … overall, the city received a clean opinion, or what would be considered unmodified opinions,” she said. “There would be 12 of those clean opinions.”

An unmodified opinion refers to when an auditor concludes that the financial statements of a given entity are presented fairly, in all material respects, in accordance with generally accepted accounting principles.

“There is an adverse opinion related to the fact that for the aggregate discretely presented component unit,” Hanson said. “Those (financial documents) are not in here, in terms of the volunteer fire association is not presented in these statements, so because that is excluded, that piece of it is adverse.”

An adverse opinion refers to when financial statements do not fairly present the financial position, results of operations, or cash flows of the entity in conformity with generally accepted accounting principles.

The draft of the independent auditor’s report states, “Accounting principles generally accepted in the United States of America require financial data for the component unit to be reported with the financial data of the City’s primary government unless the City also issues financial statements for the financial reporting entity that include the financial data for its component unit. The City has not issued such reporting entity financial statements. The effect of this departure from accounting principles generally accepted … to include the amounts of assets, liabilities, net position, revenues and expenses of the aggregate discretely presented component unit have not been determined.”

Overall, financial activity is relatively consistent with previous audits, Hanson said, adding that there was no new debt during 2017 to have to report.

The Financial Highlights section of the financial statements describe that the city’s net position from governmental and business-type activities increased by $8,136,712, primarily due to the receipt of grants and infrastructure contributions from developers and an overall reduction in expenses for all departments. During the year, the city’s revenues generated from charges for services, taxes, and other revenues of the governmental programs were $5,210,332 more than the $13,034,369 governmental expenditures, excluding transfers. It adds that in the city’s business-type activities, revenue increased by 64 percent to $9,965,104, while expenses increased by 4 percent to $7,038,724, due to a full year of operations of the Black Hills Airport (acquired in September 2016) and overall expense reductions in departmental operations. In addition, the general fund reported a $633,904 current year increase in fund balance primarily due to additional revenues for contract wildland operations of the Spearfish Fire Department and cost reduction measures within all general fund departments.

Hanson explained that the audit did identify a few issues and pointed a few out, as well as the recommendations for corrections. Audit adjustments, including correcting capital assets, reclassifying debt service, and adjusting pension expense and the related net position were proposed as part of the audit process.

Another finding showed that the city has invested in negotiable certificates of deposits, which is in violation of South Dakota Codified Law 4-5-6, which indicates the types of investments a municipality may invest public funds. The recommendation is that the city reevaluate its investment policy and invest the funds in investments allowed by state law.

Another finding showed that not all parking fine revenue transactions were consistently coded, with some recorded in the parking fund, rather than the general fund per city policy, and the recommendation is that the finance office should review the general ledger coding for proper funds when reconciling the daily receipts journal, to include receipts prepared by the police department.

Corrective action plans, with anticipated completion dates, are provided for the findings within the report, and at the conclusion of her report, Hanson asked if there were any questions from the council.

Mayor Dana Boke congratulated the finance office staff.

“Overall, very, very good, and any errors were corrected,” she said.

Boke asked about the adverse opinion; the city also received an adverse opinion for the 2016 audited financial statements for the same reason, the exclusion of the financial statements from the Spearfish Volunteer Firefighters’ Association (SVFA), and she asked where the process to complete the 2016 financial statements was in terms of that.

Hanson replied that the firm has received some information from the association, worked through the information they have, and asked for additional information in terms of deposits and invoices that the firm has not received yet. She described that the firm is “in a holding pattern” until it receives that financial information from the association.

The council unanimously approved accepting the 2017 audited financial statements. Councilman John Lee was absent.

In February, the association stated that the necessary financials had been provided for the 2016 audit.

“SVFA has been providing information to the auditor for over a year; the last necessary financials were provided around the end of last month,” a letter dated Feb. 8 from Eric Nies, legal counsel for the association, states.

It is unclear where the parties are in the process, as each legal team sees the situation differently.

Nies wrote Thursday via email that though he was not privy to what exactly was requested, the association members have received informal requests from Ketel Thorstenson “… and, throughout 2017, the volunteers have attempted in good faith to comply with all such informal requests; however, given the volume of data requested, it is always possible something may have been missed,” Nies wrote. “For that reason, the volunteers have relied on the City to formally tell them what it needs – for both audit and litigation purposes – through the formal discovery process.”

The city filed a lawsuit against the association in January, with the association filing a countersuit in February. The parties chose to cancel a court hearing in May to pursue discussions to try to find a resolution in the interests of people who fund and are provided fire and emergency services in Spearfish and the surrounding fire protection district.

Discovery is a pre-trial procedure in a lawsuit in which each party, through civil procedure, can obtain evidence from the other party or parties.

Nies described that the association provided “literally thousands of pages of information” to the city in April, which included financial information dating back before 2011, and “Essentially all financial information in the volunteers’ possession regarding their finances in 2015, 2016, and 2017, was formally given to the city,” he wrote, describing that there is a formal process for the city to ask the volunteers to augment their responses, or to object if something is missing, during the formal discovery process.

“If something was missing, the proper response should have been a formal request from the city, which was never received by the volunteers,” Nies wrote.

Thomas Brady, of Lynn, Jackson, Shultz, and Lebrun, representing the city, said Friday via email that as part of an audit, one of the standard procedures is the auditor selecting specific transactions and requesting explanation or further detail as to those transactions.

“The initial list was presented to the Association many weeks ago,” Brady wrote.

He added that while he does not know what specific communications have been made by the auditor to the association, he has also sent two letters to the association’s attorneys regarding the lack of cooperation by their client with the auditor and received no response.

“The association was a component unit of Spearfish during this period of time being audited,” Brady wrote. “The refusal to cooperate with a prior audit was a major reason the litigation was commenced in January 2018, to force disclosure in regard to the use of the people’s money.”

“The answer will be found out, with or without the promised cooperation from the Association. The people are entitled to know,” Brady said.

Nies said in an email Friday that the association’s legal team had received a letter from Brady but that only one sentence referenced the audit.

“There is a specific process set forth in the Rules of Civil Procedure to be followed in this situation and a vague complaint in the midst of an unrelated letter does not comply with that process,” Nies said, adding that after speaking to the auditing firm Thursday on behalf of the association, he is “personally coordinating the transfer of any data which Ketel Thorstenson reasonably needs.”

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