FPIC Sample Responses and Resources

The sections below provide sample text that can be used by governing bodies required to submit a response to the LGC due to significant deficiencies, material weaknesses, or other findings in the audited financial statements, or if the auditor determined that Financial Performance Indicators of Concern were identified. A response must be submitted to the LGC within 60 days of the auditor's presentation. Details on this response requirement are available in North Carolina Administrative Code 20 NCAC 03 .0508.  

The governing body should be notified by its auditor during the presentation of the audited financial statements of any significant deficiencies, material weaknesses, other findings, or Financial Performance Indicators of Concern. The auditor must also notify the governing body of their requirement to submit a response, if applicable. Details on the auditor’s responsibilities are available in North Carolina Administrative Code 20 NCAC 02 .0502

Note: The word “FALSE” in a general performance indicator cell indicates an error in how the data input tab was completed. Look at the Data Input tab and the specific accounts used to calculate that indicator. Make sure that the directions were followed for every account used to calculate that indicator. 

Fund Balance Available

Possible response to a low fund balance available for appropriation might include the following. Note: More than one of these paragraphs may be used, depending on the actions the government chooses to take. 

  • To increase fund balance available for appropriation in the General Fund by exercising greater control over expenditures, the unit is committed to {maintaining expenditures at a level that won’t not exceed actual expenditures for the prior fiscal year ended {June 30, 202x}} {reducing {specific} expenditures by $xx,xxx from the prior year’s actual expenditures for a total reduction in expenditures of $xxx,xxx}. Additionally, the unit {will emphasize the importance of an effective pre-audit process and provide additional training to staff on the statutory pre-audit requirement} {will review budget to actual reports for all funds monthly at board meetings} {will focus attention on the collection of all budgeted revenue}.The unit estimates the focus on control of expenditures and collection of revenue will result in {additional revenues of $XXX} and/or {reduced expenditures of $XXX} for the fiscal year ending June 30, 202x. 
  • To increase fund balance available for appropriation in the General Fund by controlling expenditures, the unit’s original budget for 202x {budget for 202x as amended on {date} by governing board Resolution XX} reduces expected revenues and budgeted expenditures by $x,xxx from the prior year’s actual expenditures of $x,xxx for the fiscal year ended June 30, 202x. 
  • To increase fund balance available for appropriation in the General Fund, the unit increased {is committed to increasing next year} the property tax collection rate from the prior {current} level of xx.xx% which is expected to generate $xxx,xxx of additional tax revenue. The unit expects to generate additional property tax revenue by {contracting with County to collect property taxes} {providing additional support and training to property tax staff} {contracting with the unit’s attorney to assist in collecting delinquent taxes}.The unit will endeavor to hold expenditures at the current level. It is estimated that with the combination of the increased tax revenue and stable expenditures, the amount of revenues over expenditures in the unit’s General Fund will increase by approximately $xx,xxx this {next} year. 
  • To increase fund balance available for appropriation in the General Fund, the unit increased {is committed to increasing next year} the property tax rate to $0.xx/$100 from the prior {current} rate of $0.xx/$100 which is expected to generate $xxx,xxx of additional tax revenue. The unit will commit to holding expenditures at the current level. It is estimated that with the combination of the increased tax revenue and stable expenditures, the amount of revenues over expenditures will increase by approximately $xx,xxx this {next} year. 
  • To increase fund balance available for appropriation in the General Fund, the unit’s governing board adopted a fund balance policy which requires {describe significant provisions of policy}.It is estimated that the fund balance available for appropriation will improve to the level established in this policy this {by next} fiscal year end. The governing board is committed to compliance with the provisions of the fund balance policy. A copy of the policy we adopted is enclosed. 
  • The fund balance available for appropriation in the General Fund has declined to xx% of expenditures because the unit had expended funds in the amount of $xx,xxx for the {describe expenditure or project}.The unit expects to rebuild the fund balance available by {reimbursement from the (describe debt issuance approved by the LGC on specific date; by FEMA reimbursement of project receivables of $xx,xxx; or by the reduction of future expenditures over several years by $xx,xxx the amount of project expenditures}.The unit estimates the fund balance available for appropriation to increase to approximately $xxx,xxx by June 30, 202x. 

Water/Sewer/Electric Fund: Quick Ratio

Quick Ratio The Quick Ratio is calculated by dividing unrestricted cash plus accounts and other receivables by the sum of accounts payable, accrued liabilities and the current portion of long-term debt. More specifically, it is total current assets excluding any restricted current assets, inventories, prepayments, and interfund receivables due after twelve months by the sum of total current liabilities including the current portion of long-term debt excluding bond anticipation notes payable, current liabilities payable from restricted assets, interfund payables due after twelve months, and the current portion of compensated absences payable, pension liabilities, and OPEB liabilities:  

Possible responses to a Quick Ratio below 1.00 in a Water, a Sewer or an Electric Fund. Note: More than one of these paragraphs may apply depending on the actions taken. 

  • To improve the Quick Ratio in the {Name} Fund, the unit increased (is committed to increasing next year) {the amounts charged for {specify} services by x.x% which should generate $xxx,xxx in additional revenue} {will hire consulting engineers to conduct a rate study to make recommendations regarding the schedule of service charges}.The unit will commit to maintaining operating expenses at the current level. It is estimated that with the combination of the increased revenue and stable expenses, the fund’s Quick Ratio will improve over time. 
  • To improve the Quick Ratio in the {Name} Fund by improving cash collections, the unit has {describe the steps taken to increase the cash collections from providing utility services, including enhanced collection policies}. 
  • To improve the Quick Ratio in the {Name} Fund, the unit will discontinue the transfer of assets to the {Name} Fund. The {Receiving} Fund will {increase rates or revenues} {decrease expenditures or expenses} so that its {Fund Balance or Quick Ratio} will not be adversely affected. 
  • To improve the Quick Ratio in the {Name} Fund, the unit {{is investigating or will investigate} regional consolidation with the nearby system} {{will contact or has contacted} ------ for addition assistance with utility management}. 
  • The Quick Ratio has declined to xx% because the unit had expended funds in the amount of $xxx,xxx for the {describe capital project} which is {in process or completed}.The unit expects to improve current assets over time through a combination of {increased revenue from rate increases of XX% and/or fees for additional services} {stable expenses because of more efficient operations} {reimbursing the amount expended on the capital project with a financing that was approved by the LGC in {Month Year}}. 

Water/Sewer/Electric Fund: Operating Net Income

Possible response to Operating Net Income (Loss) excluding Depreciation plus Debt Service Principal is negative: 

  • To decrease the amount of operating loss excluding depreciation plus debt service principal to a positive value in the {Name} Fund, the unit increased (is committed to increasing next year) the amounts charged for {specify} services by x.x% which should generate $xxx,xxx in additional revenue. The unit will also commit to holding operating expenses at the current level. We estimate that with the combination of the increased revenue and stable expenses, the operating loss will decrease by approximately $xxx,xxx. 
  • To increase the amount of operating net loss excluding depreciation plus debt service principal to a positive value in the {Name} Fund, the unit decreased (is committed to decreasing next year) the amounts paid for {specify expenses} by x.x% which should generate $xxx,xxx in additional operating net income. The unit will also commit to holding operating revenues at the current level. We estimate that with the combination of the stable revenue and decreased expenses, this operating loss will decline by approximately $xxx,xxx. {When possible, units are encouraged to both increase revenue and decrease expenses for the most impact.} 

Water/Sewer/Electric Fund: Unrestricted Cash

Possible response to a ratio of Unrestricted Cash divided by Total Expenses excluding depreciation plus debt service principal is less than 16% or approximately two-month expenses: 

  • To improve the ratio of unrestricted cash divided by total expenses excluding depreciation plus debt service principal (“cash to expense ratio”), the unit increased {is committed to increasing next year} the amounts charged for {specify} services by x.x% which should generate $xxx,xxx in additional revenue. The unit is committed to maintaining operating expenses at the current level. We estimate that with the combination of the increased revenue and stable expenses, unrestricted cash will improve. 

Water/Sewer Fund: Transfers

Comments should clearly explain the purpose of the transfers-in that are supporting water and sewer operations and are greater than 3% of the total of operating expenses plus non-operating expenses. 

Because governmental funds and proprietary funds serve different constituents, each should be self-supporting, and each fund type should not subsidize the other. Additionally, transfers are not used to record transactions where one fund reimburses another fund for expenditures or expenses paid on behalf of the other. Memo 2014-07 and Memo 2022-07 posted on our website will help clarify the accounting treatment for reimbursements between funds. 

Possible responses regarding transfers-in that are greater than 3% in support of water and sewer operations might include some of the following:  

  • The transfer-in from the {name} Fund was required to improve the performance of the {Water or Sewer} Fund until water or sewer revenue increases {expenses decrease}. The unit {increased} {is strongly committed to increasing next year} {the amounts charged for {specify} services by x.x% which should generate $xxx,xxx in additional revenue} {will hire consulting engineers or a nonprofit such as SERCAP or Rural Water to conduct a rate study to make recommendations regarding the schedule of service charges}. The unit will commit to maintaining operating expenses at the current level. With the combination of increased revenue and stable expenses, we estimate that the fund’s financial performance will improve over {the next two years} {or other specific timeframe} and the need for the transfer-in will diminish. 

  • The annual transfer-in from the {name} Fund is currently required to keep {water or sewer} rates affordable for the {elderly or low income} population served by the utility. This population with an annual income under $xx,xxx per year represents xx.x% of the customer base. The average utility cost for this population is approximately $xxx per month and without the subsidy it would be approximately $xxx per month, a x.x% increase and xx% of low-income household income. The {Water or Sewer} Fund is taking {describe the steps taken to control utility operating costs or otherwise reduce the need for the subsidy}. 

  • The transfer-in from the {name} Fund are currently required because the {population has declined to x,xxx from xx,xxx, a reduction of x.x% with a corresponding reduction in the system’s customer base} {a large plant left town} resulting in excess plant capacity and increased unit costs. This {demographic shift} {demand reduction} has reduced revenue by xx.x%. Rates would need to be increased by xx.x% to generate sufficient revenue to offset this reduction. Such a rate increase would make it more difficult to recruit new businesses and to stem the population decline. 

  • We recognize that the transfer-out to the {Water or Sewer} Fund reduces the fund balance of the General Fund. The fund balance available for appropriation of the General Fund currently totals $xx,xxx,xxx, an increase/decrease of x.x% from the prior year. The fund balance available for appropriation represents of xx.x% of expenditures and transfers out. The unit understands that transfers-out to the {Water or Sewer} Fund cannot be allowed to damage the financial health of the General Fund. {A paragraph of this type may be used in conjunction with any of the other explanations as an acknowledgement of an issue or concern.}  

  • The Board has adopted {will adopt} at the meeting on {date} a resolution whereby the {Water, Sewer, Water and Sewer} Fund agrees to repay the General Fund $x,xxx,xxx, the amount of the Due to General Fund. The terms of the repayment agreement include {monthly, quarterly or annual} repayments in the amount of $xx,xxx over x years with interest calculated at x.xx%. {Describe the changes made in the operation of the {Water, Sewer or Water and Sewer} Fund that will reduce the need for financial assistance from the General Fund.} The Board is committed to operating the fund in such a manner that future support from the General Fund will not be required. A copy of the Board resolution is attached. 

  • The Board has adopted {will adopt} at the meeting on {date} a resolution whereby the General Fund agrees to repay the {Water, Sewer, Water and Sewer, Electric} Fund $x,xxx,xxx, the amount of the Due to {name} Fund. The terms of the repayment agreement include {monthly, quarterly or annual} repayments in the amount of $xx,xxx over x years with interest calculated at x.xx%. {Describe the changes made in the operation of the General Fund that will reduce the need for financial assistance from the {other} Fund.} The Board is committed to operating the General Fund in such a manner that future support from another fund will not be required. A copy of the Board resolution is attached. 

  • In addition to the above suggestions, please refer to the unit’s prior year response to the LGC if required to provide one and update the LGC on your corrective action plan. 

Audit Not Submitted on Time

Possible explanation regarding the late filing of financial statements should include both the reason the current financial statements were delayed and the action taken to assure timely completion of future financial statements: 

  • The unit was unable to provide timely financial information to the audit firm and provide the financial statements by the filing deadline because {description of specific reason for the delay}. 

To prevent recurrence of the late filing of financial statements, the unit will {description of specific actions taken or by the specific timeline for actions that will be taken by the unit to assure the timely filing for future financial statements.} 

Some specific examples follow: 

  • The unit was unable to provide timely financial information to the audit firm and provide the financial statements by the filing deadline because of the difficulty in hiring a qualified individual with appropriate experience necessary to draft financial statements as finance officer. While the current accounting staff can perform routine monthly accounting tasks competently and efficiently, they lack the technical skills, knowledge and experience to prepare annual financial statements. 

To prevent recurrence of the late filing of financial statements, the unit has contracted {will contract with} a qualified accountant to provide the following services:{Edit services to reflect actual agreement with accountant} prepare timely monthly financial information for presentation to the governing body that includes condensed financial statements for each major fund as well as budget-to-actual reports for each fund; timely reconciliation of all bank statements to the general ledger each month; timely reconciliation of receivable and payables subsidiary ledgers to the general ledger each month; preparation any necessary adjusting entries for posting by the unit; attend the monthly board meeting when financial information is presented; and provide the necessary assistance to prepare audit financial statements on a timely basis. The most recent monthly financial information and budget-to-actual report is included for your review. 

  • The unit was unable to provide timely financial information to the audit firm and provide the financial statements by the filing deadline because {of the unexpected resignation of the finance officer on {date} and the difficulty in hiring a qualified individual with experience {providing information necessary to draft financial statements} {preparing financial statements} to fill the position after an extensive search. 

To prevent recurrence of the late filing of financial statements, the unit will provide additional training to finance officer and accounting staff to improve their technical skills and knowledge and will hire a qualified contract accountant to provide the following services {select from preceding example}.The most recent monthly financial information and budget-to-actual report is included for your review. 

  • The unit was unable to provide timely financial information to the audit firm and provide the financial statements by the filing deadline because of the computer virus that infected the accounting system and required reentry of {number} months data {and description of any other specific effects of the data loss}.Reentry was required because the backup procedures failed due to {describe condition that caused backup system failure}. 

To prevent recurrence of the late filing of financial statements, the unit has provided additional training to accounting staff regarding internal controls and backup procedures.{Describe procedures implemented to prevent failure of backup processes}. The unit is interviewing candidates to select a qualified consultant to review the adequacy the unit’s revised internal controls and backup procedures. 

Uncollected Tax Levy

Possible explanation regarding budget tax levy was more that 3% uncollected, i.e., the ad valorem tax collected divided by the original budget for ad valorem taxes is equal to or greater than 97%.Consider the total amount of the property tax budgeted for the current year. Did the unit’s tax revenue collections make up less than 97% of the amount budgeted in the current year?  

  • To increase the amount of ad valorem taxes collected, the unit has {describe the steps you have taken or have scheduled including the dates scheduled or completed for additional employee training or hiring additional staff, for the use of debt setoff, garnishments and foreclosures, for updating procedure manuals and documentation, and for contracting with the county to collect taxes on your behalf}. 

Decrease in Property Tax Value

Possible actions to prepare for or respond to a decrease in property values at the next revaluation include. Note: Since counties fund and oversee the revaluation process, a projected decrease in property values resulting from a revaluation is based on those counties that are completing revaluations in a given year. Therefore, municipalities will need to answer this question based on the county in which they are located. 

  • At the property revaluation scheduled for {fiscal year end} {recently completed}, the unit experienced {expects} a reduction in the property valuation to $xx,xxx,xxx from $xx,xxx,xxx, a xx.x% decrease. As required by G.S. 15911(e), the revenue-neutral tax rate has been determined to be $0.xxx/$100.At the current tax rate of $0.xxx/$100, the unit’s tax revenue will be reduced by $x,xxx,xxx. In response to the reduced ad valorem tax revenue, the unit has {determined that tax rates of $0.xxx/$100 will provide additional tax revenue of $x,xxx,xxx, increases in fees for {describe fees} will provide additional revenue $xxx,xxx, and a reduction in expenditures of $xxx,xxx for {describe activities} will offset the reduction in tax revenue due to the lower property valuation.} 

Pre-Audit Process

Possible actions when pervasive over-expenditures indicates that the pre-audit process is not effective; 

  • Over-expenditures that occurred {in the {named departments} were the result of {describe reasons}.The unit has provided additional training to staff in these departments and updated procedure manuals and documentation on the unit’s procedures in authorizing expenditures {expenses} and making commitments} {in the {named departments} were the result of audit adjustments to record addition accounts payable and expenditures {expenses}.To prevent audit adjustments in the future, the unit will carefully review the budget-to-actual reports for all units in {May or other month}, estimate expected year-end adjustments for payables and have the Governing Body adopt before the fiscal year end appropriate amendments to the budget. 
  • Over-expenditures that occurred {in the {named departments} were the result of closing on an unanticipated {installment purchase, etc.} and expending the proceeds to acquire {describe}.The unit has provided additional training to staff in these departments and has updated procedure manuals and documentation to reflect the need to amend the budget before making commitments expend funds and the unit’s procedures in authorizing expenditures {expenses}. 

Mandate with Unbudgeted 3% Financial Effect on Water/Sewer Fund

A mandate was place on the unit by DEQ, court order or other requirement that will have an effect of greater than 3% of the Water and Sewer Budget and is not budgeted: 

  • In response to the {fully describe mandate}, the unit has determined that the financial impact in the current fiscal year will be approximately $xxx,xxx and in the next fiscal $xxx,xxx. The unit has amended the budget for the current year to account for these expenditures and will include appropriate amount in the budget for the following year. The unit has taken {will take} the following actions the recurrence of the circumstance:{describe in detail the actions the unit has or will take with expected timelines}. 

Unit Assistance List

No performance indicators of concern but on Unit Assistance List: 

  • Please refer to the unit’s prior year response to the LGC and provide a thorough update to your corrective action plan.

Statutory Violations

Statutory violations are described in the notes to the financial statements or in the compliance reports: 

  • Note # on page XX of the financial statements reports {describe the statutory violation}.{Describe in detail the steps the unit has taken and the dates of such action that demonstrate the unit’s commitment to eliminate this statutory violation.} {If additional action is required, describe in detail the steps the unit has or will be taking and the dates such action is expected to be complete} {The description should be sufficiently detailed to allow the reader to determine whether the action if properly implemented is adequate to prevent the statutory violation in the future.} 

Debt Service Payments

Possible response to failure to comply with bond covenants or late debt service payments: 

  • As required by the bond documents, the unit has notified bond counsel and {has contacted {name of consultant} to begin a water and sewer rate study within the next month} {has completed a rate study with {name of consultant} and the {Governing Body} has increased rates as recommended with the rate study. The new rates will be effective on {date} and are projected to provide debt service coverage that meets the requirements in the bond documents.} 

Landfill Closing

Response to landfill closure within five years: 

  • The unit’s response should provide an update on the current balance and an update on the source and amount of future funding. 

Material and Significant Findings

Material weaknesses or significant deficiencies are reported by the auditor, however  

  1. If the only material weakness or significant deficiencies is the lack of segregation of duties then no response is required but please refer to Memo 2015-15;
  2. If the only material weakness or significant deficiencies is the lack of expertise then no response is required. 
  • The unit was {description of specific condition justifying the material weakness or significant deficiency}. Note: Be specific about actions taken. 

To prevent recurrence of the {condition}, the unit has {description of specific actions taken with the date completed or by the specific timeline for actions that will be taken with expected completion dates by the unit to prevent recurrence of the material weakness or sufficient deficiency.} {The description should be sufficiently detailed to allow the reader to determine whether the actions if properly implemented are adequate to prevent the material weakness or significant deficiency in the future.} 

  • The Schedule of Finding and Question Costs included as a material weakness {that the journal entry preparation and review process was inconsistent and in fact several journal entries had no supporting documentation. It was recommended that the unit implement additional procedures to prevent recurrence of this weakness. The unit has stressed the importance of consistent processes to accounting staff and has taken {describe the specific steps taken and the date implemented and steps the will be implemented with the expected implementation date such as revision of procedures manual, additional employee training, additional review procedures}. 

Electric Transfers Out

Electric transfers: 

  • Please describe in detail the steps that have been taken to comply with G.S. 159B39. 

Additional Issues or Comments

Additional issues or comments: 

  • Please describe in detail the steps that have been taken to address any other significant or material findings presented in the financial statements or resulting from the audit of the financial statements. Include any additional facts or circumstance you believe should be
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