Financial Analysis & Management Considerations Report 12/31/1997

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City of Lino Lakes, Minnesota Management Report Capital Project Funds To the City of Lino Lakes credit, swift action has been taken since the notification to our office on April 23, 1998 of the contract noncompliance including the following: • Negotiation of a settlement with the City of Shoreview. • Correction of accounting records and 1997 financial statements to reflect the liability _ and disclose the nature of the prior period adjustments. • Authorization of extended audit procedures in light of the internal control failure with respect to this agreement. • The hiring of an attorney to conduct an independent analysis of the cause of the system failure and to recommend improvements. Our firm works extensively with cities. The challenges facing cities with respect to designing adequate controls is complicated by: ✓ The diverse business activities carried out. Most private companies have one or two core business activities (ex: manufacture tools or sell and service products). This contrasts with cities which have extremely diverse business activities (ex: recreation, fire protection, street maintenance, land development, water and sewer enterprises, etc.). ✓ Each of the diverse business activities has distinct compliance regulations, contractual rights and obligations and often unique accounting and other control requirements. ✓ The diversity of business activities requires de- centralized "specialists" within the City to operate each activity with some degree of autonomy while still coordinating with central control functions such as finance and administration. Page 42