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