Rocky Mount audit: clean opinion, but auditors flag low fund balance and utility accounting problems

Auditors from Martin Jenkins told the Rocky Mount City Council at a May work session that they issued an unmodified (clean) opinion on the city’s fiscal year ended June 30, 2024, financial statements but identified several findings and financial-performance indicators that require management attention and a response to the North Carolina Local Government Commission.

The audit opinion matters because a clean opinion means the financial statements are presented, in all material respects, in accordance with generally accepted accounting principles; the nut of the auditors’ concerns is that some internal controls and accounting practices produced large audit adjustments and exposed the city to risks in utility and general fund reporting.

Tim Lyons, engagement partner for Martin Jenkins, said, “We did render an unmodified or clean opinion on the city's financial statements.” He also warned that the city’s unassigned general fund balance had fallen “quite significantly” and would prompt follow-up from the Local Government Commission (LGC). “The LGC will require a response from the city,” Lyons said, adding that the audit has already been submitted to the LGC and the commission will review and accept the audit or ask for clarifications.

Most important findings

- Fund balance and LGC reporting: The auditors reported the city’s unassigned general fund balance at about 6% of annual expenditures, down from the council’s 2015 fund-balance policy target of 10%. Lyons said the LGC uses a 25% benchmark as an early-warning standard and will ask for a corrective plan because the city’s ratio is below best-practice guidance.

- Enterprise accounting inconsistency (finding): Auditors elevated a repeated management-letter comment to a finding because the city’s conversion process from modified-accrual (budget) accounting to full-accrual financial reporting for enterprise funds was inconsistent. Lyons said the inconsistency caused delays and numerous journal entries at year end.

- Capital assets and payables (material adjustments): Audit procedures required large adjustments in the enterprise funds to move amounts that met capital-asset criteria out of expense and into capital-assets; auditors also identified an omitted accounts-payable accrual of about $1,400,000 that had to be recorded as a year‑end liability and related expenditure.

- Inventory (significant deficiency): Audit observation found inventory items aggregated incorrectly (for example, a box recorded as one item rather than 10), requiring an inventory correction of roughly $235,000 in the general fund.

Single-audit and grant testing

Lyons said Martin Jenkins performed single-audit procedures on four major programs this year — two state and two federal — and found no single-audit findings for those tested programs. The state programs audited were the Powell Bill (local government road assistance) and a state tornado grant; the federal programs were the federal transit cluster and HUD HOME. The auditors noted that in prior years ARPA (American Rescue Plan) expenditures had dominated federal coverage but now the firm had to audit a mix of programs to reach required coverage.

Management communications and recommendations

Lyons reviewed required communications and management-letter recommendations, including: - Post all required audit adjustments to the general ledger so the city starts next year on a corrected basis. Lyons noted management’s representation letter excludes confirmation that adjustments have been posted and emphasized the importance of posting them. - Strengthen review of manual journal entries: of 25 tested entries, three lacked evidence of secondary review. - Consider separate capitalization thresholds for right-of-use lease assets (GASB 87/96) to simplify year-end processing. - Perform month‑by‑month bank reconciliations and improve controls around the main operating account. - Reassess the allowance for uncollectible accounts in enterprise funds and the aging of receivables; the auditors said the city has not consistently adjusted that allowance and warned it may be elevated to a finding if not addressed. - Continue cybersecurity and IT controls improvements identified in the IT risk questionnaire.

Pensions and other balances

Lyons summarized pension reporting: the city’s proportionate share of the statewide Local Government Employees’ Retirement System (LGERS) net pension liability reported in the financial statements was approximately $40,100,000 (measured at 6/30/2023 for 2024 reporting). Lyons said the LGERS plan was about 82.5% funded as of the plan measurement date. He also described the Law Enforcement Officers’ Special Separation Allowance (LEOSA) liability at about $9.3 million and noted most North Carolina governments fund LEOSA on a pay-as-you-go basis.

Council questions and next steps

Council members asked for clarifications on useful lives used for depreciation (Lyons said distribution system infrastructure lives ranged generally 30–75 years and equipment 7–10 years), the basis for the LGC’s concern, and details about grant‑loan receivables (roughly $3.9 million in program loans that, depending on program terms, may be forgiven). Lyons confirmed the audit package has been submitted to the LGC and that the commission will require a written response addressing the financial-performance indicator of concern for the general fund.

No formal council votes were recorded during the auditors’ presentation. Lyons offered to return in person and requested city management ensure all audit adjustments are posted promptly; city staff agreed to follow up and provide requested details to council members.

Ending

The audit presents a clean opinion on the city’s financial statements while identifying internal-control and reporting weaknesses the city must address in its LGC response and in routine finance operations. Council members and staff said they will follow up with requested schedules and consider the auditors’ management recommendations as the city prepares the upcoming budget.