Auditor flags segregation-of-duties weakness; Eureka posts $56,000 general-fund shortfall in 2024

Ron Stewart, an auditor from Gilbert and Stewart, told the Eureka City Council on July 28 that his firm found the city’s 2024 financial statements “meet accounting standards” but identified one significant deficiency in internal controls: weak segregation of duties in cash-receipt and payment processes.

The finding matters because one person handles multiple steps that should be separated — receiving invoices, entering them into the system, preparing and signing checks and reconciling bank statements — increasing risk that errors or improper payments could go undetected.

Stewart summarized the audit work and results, saying the firm checks three main areas: whether financial statements are materially correct, whether internal controls are designed and operating effectively, and whether the city complies with state law. “What I’ll do is just really talk about those 3 areas,” Stewart said, explaining confirmations, invoice tests and capital-asset reviews used to verify balances.

On the books, Stewart said the general fund showed a $56,000 deficit for the year: the city recorded about $447,000 in general-fund revenues and $503,000 in expenditures. He said the city had $362,000 in cash on hand as of June 30, 2024, though some of those funds are restricted for specific uses such as roads.

Enterprise funds (water, sewer, sanitation) showed mixed results on a cash basis: Stewart said the sewer fund generated about $143,000 more cash than it spent, the water fund lost roughly $3,500 and sanitation roughly broke even. On an accounting basis that includes depreciation, the three enterprise funds together showed a loss of about $151,000, driven in large part by nearly $392,000 in depreciation expense.

Stewart told council members the high depreciation expense makes enterprise operations look unprofitable even when cash flow is positive. He also explained legal and procedural limits on moving money between enterprise funds and the general fund: transfers from the general fund into enterprise funds are straightforward, but moving enterprise money back to general operations requires public notice and hearings.

On internal controls, Stewart said the auditor team flagged segregation-of-duties as a significant deficiency. “There’s something that’s called segregation of duties,” he said. “One person was performing a significant number of those functions.” He recommended the council and staff implement a separation of tasks and said the council may need to assume some review and approval duties until the city can add staff or otherwise split responsibilities.

Council members and staff discussed interim fixes. One council member said he had been reviewing and initialing invoices to provide a check on operations but acknowledged that ad hoc arrangements are not a long-term solution. Stewart described common best practice: department heads should initial invoices showing budget authorization, an accounts-payable person should prepare payments, and someone outside that function should approve or sign checks.

Stewart also explained the audit timeline. He apologized for a delay in delivering the audit, citing a miscommunication with the accountant who prepares the city’s work papers and a heavy personal tax season: “I got busy overwhelmed during the the the springtime with taxes,” he said. He told the council the next scheduled audit work is set for Oct. 1 and that the firm expects to complete the process well before year-end.

The auditors tested a range of state compliance items requested by the state auditor’s office, including budgetary compliance, restricted taxes, enterprise-fund transfers and the public treasurer’s bond. Stewart said the tests found no material noncompliance with state law in the areas they examined.

Council members asked questions about practical steps for improving controls, routing invoices, and how often council members should review departmental expenditures. Staff and the auditor agreed that a formalized purchase-requisition process, clearer departmental approvals, and documented sign-offs would reduce risk until staffing changes allow better segregation of duties.

The council took no formal vote related to the audit during the work meeting; the presentation concluded with time for questions and follow-up planning.