Agenda 02-17-2026; 8-a - Minutes for January 16, 2026 Retreat and January 20, 2026 Business Meeting

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12 1 Slide #14 AAT ` Orange County,North Carolina Management Letter Comments (Recommendations) • Accounting for Special Revenue Funds During our review of the County's financial statements,we noted the DSS Payee Fund did not have any revenue or expenditure activity(outside of a journal entry writing off liabilities)for the fiscal year under audit. Based on our review of the general ledger activity,it appears the County is still accounting for this fund as If it was still a custodial fund of the County where all amounts are received as cash and offset with a corresponding liability. With the change in accounting standard that was brought about by GASB Statement No.84,Fiduciary Activities,this fund was reclassified to a special revenue fund in previous years and should be reflecting the inflows it receives during the fiscal year as revenues and conversely,the outflows as expenditures. Due to the fact that the activity for the fiscal year ended June 30,2025,was not material,an audit adjustment to reclassify the activity was not required. However,we recommend County staff implement additional internal controls or additional annual closeout procedures to the ensure the amounts are properly recorded in accordance with generally accepted accounting principles(GAAP). • Lack of Annual Budget Adoption-Special Revenue Fund During our audit,we noted that the County did not adopt an annual budget for one of its Special Revenue Funds for the fiscal year ended June 30,2025. North Carolina General Statutes and the County's budgetary policies require that all funds subject to budgetary control have a formally adopted annual budget.Without an adopted budget,expenditures and revenues in the Special Revenue Fund were not subject to formal budgetary control, increasing the risk of unauthorized spending and noncompliance with state law and County policies. We recommend that management ensure all Special Revenue Funds are reviewed annually during the budget process and that an adopted budget ordinance is approved for each fund,regardless of the activity level. Auditor's Discussion&Analysis(AD&A) June 30,2025 2 3 Vice-Chair Fowler asked about concerns of the failure to adopt a DSS budget and 4 insufficient internal controls, and absence of formal budgetary oversight. She asked for more 5 detail on how the DSS Payee Fund should be managed. 6 Tim Lyons said that these types of funds used to be called agency funds, and that's how 7 every county government in North Carolina accounted for DSS payee funds. He said GASB 84 8 changed the definition of what are now known as custodial funds and the payee funds does not 9 meet the definition of a custodial fund. He said now the DSS Payee Fund is considered a Special 10 Revenue Fund, and it reports an income statement. He said the difference is how it's set up in 11 the general ledger system with cash flowing in and going to a liability account, then the cash gets 12 paid out of the account. He said that activity must be reclassed to an income statement. He said 13 the accounting system is doing one thing and then manual adjustments must be made. He said 14 it would be better to have it accounted for in the accounting system rather than relying on manual 15 processes. 16 Vice-Chair Fowler asked if DSS has fixed the issue. 17 Tim Lyons said no, not to his knowledge. 18 Chair Hamilton asked what the definition is of a custodial fund vs. a special revenue fund. 19 Tim Lyons said there are a couple of accounting standards within the GASB literature that 20 defines what a special revenue fund is. He said special revenue funds at a minimum must have 21 a revenue stream that is restricted for a purpose. He said there are a lot of things that go into what 22 can and cannot be a custodial fund. He said there are several significant elements that GASB 23 lays out about control and who the beneficiary of the fund is and if it is outside of the government. 24 He said they question if the activity of the fund is being derived from the government's sole source 25 revenues. He said there are a lot of criteria of what can and cannot be a custodial fund. He said 26 when GASB 84 came out, the LGC said DSS Payee Funds do not meet the definition of a 27 custodial fund. He thought this changed in 2021. He said that it needs to be accounted for in the 28 accounting system from the beginning rather than making it a manual adjustment process.