Oak Ridge auditors give city clean opinion but flag Kayenta accounting issues

PUCPAs auditors told the Oak Ridge City Council on March 10 that the city's FY2024 financial statements received a clean opinion, but that the city must address material accounting weaknesses linked to the recent Kayenta software implementation.

The auditors said the financial statements were "presented fairly in all material respect," a clean opinion that indicates the statements can be relied on. But Gary Mitchell, the lead auditor for PUCPAs, told council that the audit identified two written findings: a material weakness related to financial reporting and reconciliations in the Kayenta system, and a significant deficiency tied to capital asset accounting.

The material weakness stemmed from several problems that began after Kayenta was implemented in late FY2023, Mitchell said: internal financial reports had not been routinely provided to senior management or council during the year; physical-inventory adjustments were not reflected correctly in Kayenta; unposted transactions were discovered late and had to be posted during the audit; and several year-end reports could not be produced and tied to the financial statements. "We evaluated the cause and effect of these issues and determined that this all largely stemmed from the implementation of the Kayenta system," Mitchell said.

Mitchell said the second finding involved capital assets that were not properly capitalized, errors in the CIP reports and miscalculated depreciation. Those capital-asset items were being handled in spreadsheets because imports into Kayenta were not working reliably.

City Manager Randy Heeman and staff said they are aggressively addressing the findings. Heeman said Kayenta has been fully implemented but not every module or report is yet in daily use, and the city has started delivering monthly budget reports to departments. "We will probably bring in a third party to help us with some of the other implementation issues," Heeman said, adding that the city has hired a budget manager and will propose funding for outside support in the current fiscal year.

Tom (city staff) told council that city IS staff and the budget team have already produced monthly management reports and implemented an interface that exposes detailed transactions, which is helping departments reconcile coding and transactions. He said the city will deliver quarterly budget reports to council going forward.

Mitchell also highlighted fund-balance strength: the general fund ending balance is about $35.3 million, roughly seven months of expenditures, well above the 2-month reserve recommended by the Government Finance Officers Association.

Council members asked about costs for the third-party assistance and training; staff said there will be some significant costs and they expect to bring proposals to council soon. Mitchell and staff said management agreed with the audit findings and is working on corrective action plans.

The audit report and the auditors' required communications were received for the record; council did not need to approve the report.

Clarifying details from the audit presented to council: assets for utilities rose roughly $44 million largely because of a new water-treatment plant; governmental activity revenues increased from about $127 million to $151 million partly because of state funding tied to a proposed airport land purchase and changes in K-12 funding; business-type liabilities rose (about $37 million) for debt tied to the water plant; general fund revenues exceeded budget by roughly $4.5 million for FY2024, and the year-end general fund balance represented approximately seven months of operating expenditures.

The auditors provided a management letter with two formal findings and recommended that management (1) work with Kayenta developers to fix conversion and reporting gaps, (2) fully transition capital-asset tracking into Kayenta or another system, and (3) provide timely financial reports to senior management and council. Management told council it would begin contracting for outside help and include training costs in near-term budget actions.