Management Report and Recommendations 12/31/1985

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City of Lino Lakes, Minnesota Management Report, Page 35 The preceding two schedules indicate that the Circle Pines gas utility operation has been more profitable than the Lino Lakes operation. Additionally, the Circle Pines gas utility has a positive retained earnings balance in excess of $326,000 while the Lino Lakes retained earnings account is in a deficit position. The City of Lino Lakes has certain rights with regard to the gas utility franchise agreement. One of those rights is a purchase option. The 25 year franchise agreement expires in the latter part of 1986. The City has taken the following actions regarding the gas utility operations: • Successfully worked to gain special State legislation to allow a greater number of members on the Joint Gas Utility Commission. • Reviewed optional criteria for representation on the Commission to allow for a fair and equitable method of appointing members from each City. • Started the process of analyzing accounting methods of allocating expenses be- tween each City's gas operation. This data will be used to establish terms of a renewed gas utility franchise agreement. We recommend that the City continue efforts to establish a revenue franchise agreement which will produce a share of disposable net income to the City of Lino Lakes. Internal Accounting Controls As part of our examination, we made a study and evaluation of the system of internal accounting control of the City of Lino Lakes to the extent we considered necessary to evaluate the system, as required by generally accepted auditing standards. The purpose of our study and evaluation was to determine the nature, timing and extent of the auditing procedures necessary for the expression of an opinion on the City's financial statements. Our study was more limited than would be necessary to express an opinion on the system of internal accounting control taken as a whole or on any of the categories of controls identified. The City of Lino Lakes is responsible for establishing and maintaining a system of internal accounting control. The objective of internal accounting control is to provide reasonable, but not absolute, assurance as to the safe- guarding of assets against loss from unauthorized use or disposition, and the reliability of financial records for preparing financial statements and main- taining accountability for assets. The concept of reasonable assurance recogni- zes that the cost of a system of internal accounting control should not exceed the benefits derived and also recognizes that the evaluation of these factors necessarily requires estimates and judgments by management.