My Argument for an Audit

I have been closely following Libi’s informal audit of the city’s financials, based on documents she obtained through public information requests. Following are the issues that I am most concerned about and have led me to request an audit of the city’s financials:

  1. Checks & Balances: Who is authorizing, signing and ratifying checks?
  2. Payroll: Are wages, expenses and deductions adding up?
  3. City Partners: Is the city purchasing supplies, processing payroll, providing healthcare benefits to owners and employees of third party, private sector companies?
  4. Bond Debt: Is the current level of bond debt and the scheduled payments placing a strain on city resources? Is the accounting of the debt following general accounting practices?
  5. Capital Assets, Accumulated Depreciation, or Depreciation Expense: Is the city properly accounting for capital assets, accumulated depreciation, or depreciation expense?
  6. City Financial Annual Audits:The time lag for completion between the end of the fiscal year and the completion of the audits over the 3 most recent years is increasing. 

2009-2010 audit - 9 months
2010-2011 audit  - 13 months
2011-2012 audit - 13 months and counting

 

In my opinion, none of these issues by themselves prove fraud, criminal or even unethical behavior. The problem is my opinions, and the opinions of most citizens in Beaumont, are not based on any understanding of the accounting practices of a city government. Very few of us have any idea of how a city’s books are maintained and completed. We have to rely on the opinion of Certified Public Accounting firms.

I reached out to a friend of more than 30 years who is a licensed CPA for help understanding city finance. He introduced me to a partner in his firm who has 20+ years auditing local governments. His opinion was that the private audit is creating concerns that may or may not be problematic. The concern should be whether the contracts, documented relationships and city charter authorize the policies and practices the city is employing. In other words, are the internal controls the city has put in place being followed and are they generally accepted accounting practices?

Check authorizations and signing approvals should be outlined in the City’s Charter and Organizational Charts. The contracts; amendments to the contracts; and any documented relationship agreements between the city and private sector businesses approved by the city council, should establish clear guidelines as to what the city’s obligations are to their third party private sector partners. Future balloon payments on bond debt, and the city’s short term vs. long term liabilities may be disconcerting but, on its face, don’t indicate illegal activity. Reviewing the charter of the authorizing agency created by the city council will help to indicate if treatment of the debt is following the council’s intentions. Without seeing a complete list of capital assets and how the depreciation is being reported an auditor is unable to make a judgment.

I learned I should be concerned with the time lag between the fiscal year end; the official close of the books; and the final audit. In the opinion of my friend,  the timeframe was exceptionally long and the fact that it was increasing each year did concern him. He told me to ask: What is the expected timeframe for an audit to be completed? Are the recent audits timeframes longer than normal? Why?

I have reviewed the last two audits and determined the city’s accounting firm provided a separate report with their audit that looked at the internal controls. The audit report defined the separate report in the following terms:

The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance.

I have been unable to locate the reports. I am sure they would have been included in the agenda items of a city council meetings but I can’t find them. I believe it is time to have a review of the Internal Controls in order to form an accepted accounting opinion “on the internal control over financial reporting (and) on compliance.”

The petition I began circulating last month, called for a forensic audit but after gaining a better understanding of city finance, I believe the city should begin with an audit of the finance department’s internal control practices. An internal controls review would be more affordable then a forensic audit.  It may or may not lead to a more extensive audit but I believe it is a good first phase.

The issues I outlined earlier, may just be the result of poor accounting practices and not fraud. But I believe the time has come for a third party to take a look at the city’s internal controls. I will make an official request to the city council to authorize an internal control audit. I will also request the council send out an RFP (Request for Proposal) to a number of firms, including the Big 4 Accounting Firms.

I hope we can convince the council that not only would an audit of the internal controls be in the best interest of the people of Beaumont, it would also be in the best interest of the council members. Once they know the quality of the controls put in place by earlier councils they will be better able to determine if, and where, changes need to be made. A better understanding of the inner workings of the finance department and how business decisions are being made, would give them more confidence that their plans are being followed.

Our city manager and council members have been telling us for years how our city is operated more like a business than a government. Any business who has lost the confidence of the customers they serve would first take a look at their internal systems and controls instead of just telling their dissatisfied customers everything is fine.