Kernersville audit finds clean opinion but flags workers'comp accounting error requiring LGC response

The Town of Kernersville's fiscal-year 2024 financial statements received an unmodified (clean) audit opinion, but auditors reported a material weakness in internal controls after finding prior misaccounting in the town's internal service (workers' compensation) fund that added about $324,000 to beginning net position and will require a response to the North Carolina Local Government Commission (LGC).

"The town's financial statement audit for the year ended June 30, 2024 has been completed ... As a result of our audit, we have issued a clean or unmodified opinion on the town's financial statements," said Chad Cook, director and lead auditor with Fort Vis Mazars in Greensboro, presenting the report to the Board of Aldermen.

The audit highlighted several positive financial indicators: the town's available general fund balance was roughly $10,880,000 at June 30, 2024 (an increase of about $1.5 million from the prior year), total general fund revenues were about $53.5 million (a roughly 19% increase year over year), and the unassigned general fund balance was about $9.19 million (a roughly 19.4% increase). Property tax collections remained strong at about 99.6 percent, well above the LGC concern threshold of 97 percent.

Cook attributed part of the revenue increase to the town's recent assumption of the Colfax Fire District: "Ad valorem taxes were up about $1,900,000 or 8.6 percent year over year. $773,000 of that increase is due to the Colfax Fire District," he said. Other noted drivers included growth in valuation from new development and increases in local-option and utility sales taxes.

The audit also reported a substantial rise in interest earnings, up roughly $333,000 (about 51 percent) compared with the prior year, attributable to market performance in the town's NC Capital Management Trust accounts. On the expenditure side, general fund spending totaled about $49.88 million for 2024, a roughly $2 million increase from 2023; Cook noted that prior-year comparisons are affected by federal ARPA expenditures recorded outside the general fund in 2023.

On internal controls, Cook said auditors found that in prior periods the town had been expensing payments from a workers' compensation account rather than recording the related cash in the internal service fund. "We discovered that ... instead of recording the cash related to those accounts we were expensing the payments as they were being made. And so effectively, we were underreporting cash within the workers' comp fund," he said. The adjustment resulted in an approximately $324,000 increase to beginning net position and to cash in that fund. Because the condition affected beginning balances, the auditors issued a material weakness for that fund and noted it in finding 2024-001.

Cook said there were no findings from the compliance audit of major state awards and that the town did not meet federal single-audit thresholds for 2024. He also reminded the board that, per audit procedures, the town must respond to any LGC financial performance indicator items; the town has 60 days after presentation to provide the LGC a written response if required.

Town staff and board members raised a few drafting and transmittal items in the report (for example, corrections to the organizational chart and names in the transmittal letter), and auditors said those could likely be corrected with the LGC while the report remains under review. No formal board action was taken on the audit report at the meeting.

The audit packet and the auditor's report were provided to the Board and submitted to the LGC on Nov. 30, 2024. The town also expects to receive the Government Finance Officers Association (GFOA) certificate of achievement for its 2024 ACFR, continuing a multi-year streak of awards the auditors said reflected the finance staff's work.