Showing posts with label audit. Show all posts
Showing posts with label audit. Show all posts

Tuesday, October 4, 2011

Oriental Town Meeting October 4, 2011: Rainy Day?

Bizarre town meeting tonight. Only four commissioners present (Commissioner Styron was absent).

After an interminable discussion of minutes, the board considered a request by the town manager to amend the budget. Purpose: to appropriate funds to pay bills incurred and projected for hurricane clean up and remediation, including mosquito control. When two commissioners pointed out that there are still unexpended funds in the budget, the manager explained that he has no authority to expend those funds for any purpose other than the authorized line items. Except for hurricane expenditures, the approved budget is being implemented with no problems. He further explained that hurricane expenditures will be reimbursed 75% by FEMA and 25% by the State of North Carolina. The purpose of the amendment is to allow the town to pay its bills before FEMA and state reimbursements are received.

"Well what if they don't reimburse us?" Commissioner Johnson asked. "I'm worried that the Oriental taxpayers will be stuck with the bill."

After reiterating that he has negotiated the details both with FEMA and the state and explaining that he is carefully establishing a project number for each job, following FEMA guidelines, the manager posed a key question. Suppose there were no FEMA and no funds from the state. Is there anything the town is doing (debris pickup, mosquito control, etc.) that the board wouldn't want the town to do anyway. He received no answer.

The board rejected the motion to approve the budget amendment.

Commissioner Johnson then introduced a new motion to approve a smaller amount than requested for hurricane debris pickup and for mosquito control.

A similar series of actions first rejected a requested amendment to the water fund, and then approved a lower amount than requested.

"Oh, we don't want to dip into the reserve fund," Commissioners Johnson, Roe and Bohmert explained.

In many states, the reserve fund is known as the "rainy day fund."

We just had a very rainy day (Irene) and the health and welfare of the residents of Oriental are seriously threatened. And our commissioners want to dither about whether to pay for contracted services for which we will be reimbursed.

Looks like tonight was another rainy day at the meeting.

Thursday, April 21, 2011

Water and Taxes

Two years ago, I explained that the Town of Oriental had a problem with water rates. I pointed out, as I had at Town Board meetings, that the Town had been losing money on water. Not only that, the water system had been subsidized by the general taxpayers.

This meant, among other things, that taxpayers had paid for reduced water rates for the Town's biggest water users.

Our interim town manager has recently done a more thorough examination of costs properly chargeable to the water system. His review revealed that the general taxpayer's subsidy to the water system was even higher than I had thought.

An inevitable consequence of this subsidy is that it reduced tax resources available for other town priorities. Many times over the past few years, Board members have avoided expenditures for projects that residents desired, claiming we don't have the resources. The money ($150 - $250 thousand) unknowingly spent over the past decade subsidizing the water system could have gone a long way toward meeting those needs.

Thursday, August 26, 2010

Oriental Audit News

In case you missed it - the annual audit of the Town of Oriental started Tuesday, August 24. It should be completed by Thursday.

Tuesday, August 24, 2010

Oriental Form of Town Government New Info

I understand the ordinance amending the Town's charter to a council-manager system has been found. Good. The Town needs a manager.

Thursday's special meeting to appoint an interim Town manager is important. The interim manager has all of the statutory powers assigned by state law to a permanent manager.

Whoever is appointed will be responsible for taking the town through its annual independent audit.

Thursday, August 5, 2010

County Audit

At last Monday's meeting (August 2) of the Pamlico County Commissioners, we learned that the County's auditors have completed their work except for one minor item: adding the revenue from the County's share of NC State sales tax, which will not be received until next month.

Good Job!

At Tuesday's meeting of Oriental's Town Commissioners, we heard nothing about the town's audit. I have since learned that the auditors plan to begin their work in a couple of weeks.

You may recall that the NC Local Government Commission sent a letter to the Town on March 1 requiring the Town to correct a dozen deficiencies from our last audit. The LGC went on to "urge the Board to develop a corrective action plan immediately and begin eliminating these serious internal control weaknesses."

Town Board minutes of April 6 report that Mr. Cahoon was to provide information and after consulting with the auditors, Mayor Sage would sign and send a letter in response to the LGC. I have been unable to find any record of action by the Board to develop or even adopt a corrective action plan.

Friday, June 18, 2010

Return of the Masked Marvel

I'm always genuinely pleased when Tony Tharp, (Former) editor of Pamlico Today, makes a reappearance.

Mr. Tharp isn't really masked, though from time to time he seems to wear different guises. And, as I have said before, he frequently raises issues that need raising.

While I disagree with his conclusions from time to time and am often uncomfortable with his personal invective, I agree with him on substance more often than he seems to believe.

Take the case of the letter from Heidi Artley to Oriental's Town Commissioners (or at least to some of them) last February. The entire letter is currently being withheld from the public on the grounds it is a personnel matter. Mr. Tharp wants the entire letter made public. I agree in part and disagree in part.

I just reread Charlie Hall's article in the Sun Journal February 11, 2010. It sounds to me like portions of the letter (which I have never seen) legitimately constitute a personal grievance letter conveying allegations about Mr. Cahoon's treatment of her. Those portions probably must be handled as a personnel matter and may not be made public, even though person(s) unknown who were privy to the letter did release it to the press. This is apparently the basis for allegation number three of the Town Attorney's letter of February 25 to the District Attorney.

The bulk of the letter, judging from Mr. Hall's account, seems to deal with allegations of financial irregularities involving the Town's books. Those allegations deserved serious attention.

A major problem with the allegations is that, as our auditor pointed out last December, the Town has no effective computer software controls. At the time of Ms. Artley's letter, at least four individuals had access to the Town's Peachtree Accounting System software. I believe all four had unrestricted rights to change entries in the system.

So far as I know, that is still the case. There is no integrity to the Town's books.

That's why I recommended to three of the current commissioners as early as last January that they get to the bottom of the matter by causing a forensic accountant to take a close look at the accounting system to uncover what actually happened.

I think it was irresponsible not to do so.

Thursday, June 3, 2010

Local Government Commission and Audit

Conspicuously absent from last Tuesday's Town Board Meeting was any discussion of the town's response to the letter from the Local Government Commission requiring correction of four control deficiencies and eight material weaknesses from the most recent audit.

A new audit is just around the bend. The LGC is unlikely to allow these dozen longstanding deficiencies to continue being swept under the rug.

Tuesday, March 9, 2010

Audit Update

On March 1 the North Carolina Local Government Commission sent a letter to the mayor with its analysis of the most recent audit, pointing out areas where corrective action is needed.

Of the 23 control deficiencies and material weaknesses listed by our auditor, the Local Government Commission focused on a dozen: four control deficiencies and eight material weaknesses requiring corrective action.

Of the eight material weaknesses, one appears to be partially incorrect. The town was maintaining a fixed equipment ledger. The town manager admits he didn't completely understand what the auditors were looking for. Afterward, when the ledger was found, it proved to be incomplete. That is being corrected. Another material weakness cited - the lack of a contract authorizing the town to act on behalf of Bay River - was recognized by the town board last year. An agreement has been under negotiation since last August. Substantive issues remain.

The remaining six material weaknesses reflect policies and procedures put in place years ago. When the audit was presented to the public, arguments were presented from the floor to the effect that: "we're too small," "it's too much paperwork," "that's a really bad idea," and so forth. The Local Government Commission plainly didn't agree.

Similar arguments were made about the four "significant deficiencies." Again, the LGC didn't agree.

In closing, the letter observed: "Each of the items noted by the auditor was identified to assist the Board in improving the Town's overall accounting system. We urge the Board to develop a corrective action plan immediately and begin eliminating these serious internal control weaknesses."

Friday, February 5, 2010

Town Board Special Meeting - Interim Audit

The Town of Oriental has called a special meeting for February 10 to discuss "interim professional accounting/auditing assistance, and to address additional personnel matters."

This appears to be for the purpose of addressing a proposal made by Commissioner Venturi at last Tuesday's town board meeting that the town contract with the auditing firm of Pittard, Perry and Crone to perform a mid-term audit. The cost: $2400. The reason: "the books haven't been balanced since October."

This is a superficially reasonable proposal that completely misses the point of an audit.

The reason that municipal audits are governed by the NC Local Government Commission is because the LGC is the agency that issues bonds on behalf of towns. Audits are for three purposes:
(a) to determine the financial health of the municipality (we are healthy);
(b) to verify that enterprise funds like the town's water system are financially separated from other funds, including the general fund (our audit raised a problem about that, but the Town Board had already identified the problem and was working to correct it);
(c) to determine that financial controls as required by state law are in place. Our auditor identified a number of problems in that area (e.g. lack of a purchase order system) that have existed for years.

What the audit doesn't do is "balance the books."

If there is, as alleged, a problem with the books, we need to identify the problem we're trying to solve. Then decide what is the proper instrument to solve it.

If the problem is that the books don't balance (whatever that means) or that the bank statements can't be reconciled, or that the town manager (as he admitted Tuesday) has made some incorrect Bay River entries, we don't need an auditor to correct that. We need a bookkeeper. We used to have a part-time bookkeeper. What happened?

Even if there is no present problem with the books, we should retain a bookkeeper.

It never occurred to me when we hired Mr. Cahoon that we were looking for a qualified bookkeeper. We shouldn't be paying him as much as we do to keep the books. He needs to manage. He needs to watch budget line items. He needs to make recommendations about budget amendments or other changes in priority in a timely fashion and bring problems to the Town Board's attention. He needs to supervise the town's affairs.

An auditor is not a bookkeeper. No one on town staff, so far as I know is a qualified bookkeeper.

The town should hire a part time bookkeeper.

Saturday, January 23, 2010

Town of Oriental Audit - Some Lessons Learned

I'm glad to note what seems a growing consensus among the Board of Commissioners that the audit of the Town's finances for fiscal year 2009 was competent and thorough.

I believe it likely that the town will continue to use the services of Pittard, Perry and Crone for the next audit. That's good news.

"Big Picture" Lessons from the 2009 audit report:

I think there are a number of lessons to be learned from the most recent audit, including:

1. When the auditor comes, it should be an "all hands on deck" event;

2. The auditor can be expected to investigate and report how things stand as of the day of the audit (June 30), and not what was corrected later;

3. The town gets a better and more thorough audit when the auditor comes to the town instead of doing the job remotely;

4. The purpose of listing deficiencies is to make the Board and the public aware of problems requiring attention - an audit does no good if it fails to spell out specific issues that fall short of good business and accounting practices;

5. The Board of Commissioners, and the Oriental taxpayers, need to be aware not only of the deficiencies reported in audit reports, but also of the auditors' recommended "fixes."
The Nitty-Gritty Details of the 2009 audit report:

I am working on a detailed analysis of the audit's reported Control and Material deficiencies, which I may share. Comments made at the January 5th Town Board meeting concerning the audit shed more heat than light on the subject.

Most of the listed deficiencies have already been corrected.

The major remaining deficiency is in the water system - the apparent discrepancy between the amount of water the town pumps from its wells and the amount billed to its customers.

Heidi Artley, who keeps careful track of water usage for individuals and alerts customers when she sees evidence of possible plumbing leaks, also checks each month to determine the difference between amount of water pumped from the wells and the amount billed. She informed me a few months ago that the percentage of wastage appeared to be increasing, beyond the expected loss from flushing the water system. She has some ideas as to what to look for. Fortunately, Commissioner Johnson has taken on the task of reactivating the town's Water Board, to make recommendations to the Town Board on water issues, including apparent wastage.

One Lesson from the 2008 audit - Look Beyond the Audit Report:

One additional lesson to be learned from the previous (FY 2008) audit is that the Board of Commissioners, and town citizens, need to be aware of and pay attention to communications from the auditor outside of the annual audit report.

For example, the 2008 auditor Seilor Singleton advised the town to make $500,000 in "adjusting journal entries" (AJEs) to the town books.

The auditor's recommended adjustments to the town's General Fund amounted to $250,000, or about one-third of the total amount of the General Fund budget. The adjustments to the Water Fund also amounted to $250,000, or about 125% of the amount of the Water Fund budget.

The auditor did not communicate these recommendations to the Board of Commissioners, and they were never brought to public attention.
In the future, they should be.

While I am not an accountant, I do understand that "adjusting journal entries" do not necessarily indicate there have been any problems or accounting errors. AJEs are generally a part of normal accounting procedures. However, AJEs are sometimes used to correct accounting errors, and it appears that at least one of the 2008 AJE recommendations was made in order to reconcile a $3,500 shortfall in the town's cash-on-hand account.

Whether AJEs recommended by the town's outside auditor are made to correct accounting errors or as part of the normal allocation of income and expenditures, the auditor works for the Board of Commissioners and should report all findings and recommendations - including AJEs - directly to the Board.

The preliminary audit report for FY 2009 is not the last communication the town will receive - the town can expect at least one letter from the Local Government Commission approving the audit or directing actions to be taken. There may also be a communication from the auditor forwarding adjusting journal entries. The Board, and the public, should pay as much attention to any such communications as they have to the audit report itself.

Wednesday, January 20, 2010

Town Board Meeting: Audit

This week's Pamlico News printed an article about Oriental's Town Board meeting of January 5 concerning the town audit and other issues.

This completes the accounts available in Pamlico County news media to citizens who did not attend the meeting.

I did attend the meeting, and over the next few days I will offer some additional commentary.

Thursday, January 7, 2010

Who Does the Auditor Work for?

So much nonsense has been uttered about Oriental's audit, I thought I'd try to clear the air
for the benefit of those few who read my blog.

The auditor works for the Town Board of Commissioners. He does not work for the town manager. The audit is, in effect, a report to the Town Board on the town's financial health and the effectiveness of its procedures. It needs to be thorough, for the benefit of the town.

During the last town board I pressed to replace our former auditor. The board voted unanimously to make the change.

I can't speak for the others, but here are my reasons:

1. Other elected officials in Eastern North Carolina advised that it is good practice to replace the auditor every three to five years;
2. Our former auditor had not noticed that our occupancy tax should be categorized as a restricted fund like Powell Bill funds, to be used only for specific purposes and therefore not to be counted as part of the town's unrestricted reserve fund;
3. Our auditor did not notice that the administrative fee the town charged the water fund had not been recalculated since 2001 and therefore the taxpayers were subsidizing water rate payers about $35,000 per year;
4. Our auditor did not noticed that the tourism board expenditures of occupancy tax funds were not being accounted for in our accounting software, but kept on a separate sheet of paper;
5. Our auditor didn't notice that the tourism board was "rolling over" funds from one budget year to the next;
6. Our auditor either did not notice or did not object to having a large "miscellaneous" line item in each department's budget, contibuting to sloppy bookkeeping and lack of budget discipline;
7. For the fiscal year ending June 30, 2008, the auditor provided the town on February 17, 2009 a list of 8 "Adjusting Journal Entries" for the Water Fund including 21 line items, totaling $241,330.44 with a net income effect of $81,273.36. Among the adjustments was one that increased net income by 3,503.48, labeled "Adjust cash to reconcile balance;"
8. On the same date the auditor provided 15 Adjusting Journal Entries for the Oriental General Fund consisting of 55 line items totaling $258,470.77, with a net income effect of $42,107.43;
9. The town received two complaints from the Local Government Commission about the lateness of the 2008 audit.

An audit should have addressed all of these problems.

When the auditor finally made his report of the 2008 audit to the Town Board in August 2009, more than a year after the end of the fiscal year that it covered, he made no mention of the Adjusting Journal Entries nor did he offer an explanation. Neither did he mention or explain the letter he received from the Local Government Commission directing him to make two changes before they would approve his final invoice and ordering three other less urgent corrections to the town's procedures.

I am not an accountant and can't say whether the AJE's complied with Generally Accepted Accounting Practices, but they looked a lot like gun decking to me. (See earlier post).

In late summer of 2008, our town manager at the time assured the Town Board that he had looked, and concluded that our existing firm of Seiler, Zachman & Associates offered the best deal available, even though they had just increased their fee by $3,000. He recommended we continue with them, and the Board approved his recommendation.

There seemed no reason at the time to question that judgment. By the summer of 2009, however, I was convinced that changing auditors was a matter of urgency.

I asked the new town manager to investigate whether it would be possible to retain a new auditor in time for him to audit our books for 2008 - 2009. He consulted a number of experienced people for recommendations, including a CPA who formerly resided in Oriental and served on the Town Board. He contacted three or four recommended firms and found that Pittard, Perry & Crone would agree to do the job in a timely fashion at a lower price than Seiler, Zachman & Associates (now Seiler, Singleton) had been charging. One of the attractive features of the service provided is that the Pittard, Perry & Crone auditor, Chris Burton, planned to come to Oriental to perform the audit, rather than perform it remotely as Seiler, Singleton did. The procedure for previous audits was that then town manager Wyatt Cutler personally delivered the town's documents to Mr. Singleton's office in Little Washington. A few years ago one of the town commissioners asked Mr. Cutler "you mean the auditor doesn't come here?" Mr. Cutler replied that wasn't necessary.

When I learned that we would be able to change auditors, Candy Bohmert and I called a special meeting. The town manager briefed the board, and Commissioner Styron moved that we hire Pittard, Perry & Crone. I think that unanimous decision was the right one.

Wednesday, December 30, 2009

Audit: Scheduled Presentation

Oriental's new auditor will present the audit to the Town Board at Tuesday's public meeting.

This appears to be the only important or significant topic on Tuesday's agenda. It may seem like a boring subject, but represents an opportunity for the public to hear a fresh analysis of the town's financial management strengths and weaknesses. A previous post offers my own assessment of the twenty-three items to which our auditor called particular attention.

One thing to bear in mind is that the auditing contract is not just a bilateral agreement between the town and the auditor. The North Carolina Local Government Commission (LGC) is also a party, in that the contract must be submitted to the LGC Secretary for approval. The LGC must also approve the audit, including completion of required corrections, before they will approve final invoices for payment. LGC provides a form for the contract and prescribes procedures for the audit.

This year, the LGC sent the Town of Oriental at least three letters complaining about the audit by Seiler, Zachman & Associates, PA for fiscal year ended June 30, 2008. Two of those letters complained the report was late and asked for the town's plan to correct this. The third letter identified five deficiencies requiring correction, including two items that had to be corrected before LGC would approve the final invoice. Of the five items, two related to the Water Fund.

In addition, almost four months after the end of the fiscal year, the auditing firm forwarded to the Town of Oriental five pages of "Adjusting Journal Entries." The adjustments included a credit for $3,503.48 annotated "Adjust cash to reconciled balance." Apparently this was to account for an unexplained discrepancy in cash on hand as of the date of the audit.

Tuesday, December 29, 2009

Whitewash Defined

Definitions of whitewash on the Web: (see "Audit III")

  • cover up a misdemeanor, fault, or error; "Let's not whitewash the crimes of Stalin"; "She tried to gloss over her mistakes"
  • a defeat in which the losing person or team fails to score
  • cover with whitewash; "whitewash walls"
  • wash consisting of lime and size in water; used for whitening walls and other surfaces
  • exonerate by means of a perfunctory investigation or through biased presentation of data
  • a specious or deceptive clearing that attempts to gloss over failings and defects

Saturday, December 5, 2009

Water Boarding

I understand why some officials may view undergoing an audit as a form of torture. Being criticized in public can be, at the very least, uncomfortable. But a thorough audit is a valuable resource for developing better policies and procedures.

I am critical of some past audits. I have tried to make sure my criticism is based on facts, not on personalities. I don't intend to point a finger of blame. There certainly is shared responsibility between the Town Board and past and present Town Managers.

The point of an audit is not to find blame, but to uncover problems and suggest better ways. Before we ever heard of Pittard, Perry and Crone, the Town Board learned of the Tourism Board's practice of "rolling over" unspent allocation of funds from one budget year to the next and adding that amount to the following year's budget. That is a budget no-no. Long before we had a new auditor, the last board revealed that the administrative fee charged by the general fund to the water fund hadn't been recalculated in eight years. The bottom line is that the general fund had subsidized the water fund to the tune of about $150,000 over that eight year period. That doesn't even take into account the fact (discussed by the previous board in open session) that we weren't allowing for depreciation. We discussed the problem created by not handling the town's occupancy tax as a restricted fund and accounting for it "off books."

I think it would be irresponsible to criticize without offering some constructive suggestions. My main recommendation is to establish (or reestablish) a functioning water board. Ten of the twenty-three control and material deficiencies identified by the auditor are directly connected with administration of our water plant and associated billings and collections (including Bay River).

The town has convened a water board in the past. However, I am unable to find an ordinance establishing the board, spelling out its membership, terms of office and duties. We need such an ordinance.

The water board could advise the Town Board on policy issues, including procedures addressing each of the ten items from the audit. The board could address the question of where about a fourth of our water goes. It could also play an essential role interacting with the Rural Water Center when they come in February to assist us with our rate structure.

This is urgent.

Friday, December 4, 2009

Audit Analysis

In response to popular demand, I decided to go ahead and post my analysis of the Town of Oriental's preliminary audit for FY 2008. This is decidedly unofficial and represents only my own views. These views are subject to refinement (updated January 26 2010).


Control Deficiencies (pp 45-46)

1. Expenditures made by the general fund (FY 2007) exceeded authorized appropriations by $1,089 (tourism board) and $692 (environmental). Comment: This comment reflects three separate problem areas: (a) The excess tourism expenditure resulted from the tourism board taking unexpended budget from FY 2006 and "rolling it over" into 2007 without budgeting it. This has been going on for years and violates budgeting 101. Each FY must be budgeted separately; (b) The $692 was a result of underestimating expense of the town's solid waste contract. In both cases, there should have been a budget amendment.

2. Petty cash: no adequate accountability and proper record keeping. Comment: the town did not even keep a petty cash ledger. This problem existed for many years. Petty cash, according to former Town Manager Wyatt Cutler, was reconciled once a month. The problem no longer exists because the former petty cash system has been replaced by the use of town credit cards and revolving accounts.

3. Invoices paid not defaced. Comment: we weren’t using a “Paid” stamp. This has been corrected.

4. Personnel files do not include the current year approved wages. Comment: the files are being updated. Not yet completed.

5. No schedule of accrued vacation hours by employee maintained. This function was available in our accounting software, and was being used, but no printout was being maintained on hand for easy verification.

6. Financial records need to be filed systematically. Comment: filing system is being revised and improved.

7. Powell bill report for June 30, 2009 does not balance. Expenses understated by $3001.10. Comment: This error in the July 15 report was corrected in an August 26 amendment to the report, as soon as it was pointed out by the auditors.

8. Budget amendments have been made only at year end. A check of official minutes in recent years shows that this is true. Budget should be monitored continuously and amended as needed. A factor in the past was that each department had a very large "miscellaneous line" in the budget. This may have contributed to lax budget discipline.

9. Town is billing approximately 63% of gallons pumped from wells monthly. Comment: In general, 12 – 15% waste is about normal. What we have is unlikely to be a billing problem. Water is leaking somewhere. Or it is being used through unrecorded and unread meters, or meters are badly out of calibration. This sounds like a problem with the physical plant, and it needs to be investigated. Good task for a reconstituted water board.

10. Late fees for water and sewer service not charged consistently. Comment: we have no late fees. What we do have is reconnect fees when water is disconnected due to non-payment or at customer request. It may be that some reconnect fees were forgiven due to disconnect being in error or other reason. In any event, reasons for forgiving reconnect fees are now being documented. The water board should review the procedure and recommend policy to the Town Board.

11. Water deposits, sewer deposits and prepaid bills all recorded in same account. Three new accounts have been established. Commingled accounts exist for the period before October, 2009. The problem will eventually go away with time.

12. The general fund charges the water fund $4,000 per month for administrative services. No documentation of how this is computed. Comment: I raised this issue during this year’s budget cycle. Turned out the amount was last calculated in 2001 and not recalculated for eight years, even though we had hired additional personnel, the water testing and other system requirements had grown, and much more public works time was spent on the water system than in 2001. There were other omissions, such as failure to estimate gasoline expense for meter reading. I calculated the general fund had subsidized the water fund about $150,000 between 2001 and 2008 and the annual charge should now be $82,000 instead of $48,000. We took steps in this budget cycle toward correcting this. Not mentioned in the list of control deficiencies, but another shortcoming in financial management of the water system is the failure to provide for system depreciation. Bottom line is that we are still losing money on water. The water board needs to review this before the Rural Water Association comes in February 2010 to assist in reviewing our rate structure.

Material Deficiencies (pp 46-47)

1. Segregation of duties is an on-going issue. Comment: I agree with auditor’s comment “this weakness is impractical to correct at this time due to a small staff.”

2. Bank reconciliations are performed by employees who are not independent of the recording duties and are not reviewed or approved by a second party. Comment: A new procedure assigns this task to Town staff, not the manager.

3. Upon examining the collections drawer it was noted there was approximately $7,000 on hand with some checks 14 days old. Comment: the auditor fails to mention there was no lock on the drawer. Delaying deposits of cash and checks costs money (loss of interest) as well as presenting a security problem. There may have been a misunderstanding on the part of some office personnel that daily deposits would cost the town additional money. Our new manager discovered that was not so. Daily deposits are now being made. We should also take a look at our office safe. There should be a safe suitable for depositing money.

4. The town does not have a purchase order system in place. Comment: The town started using the Peachtree Accounting software purchase order system in October, 2009. It had not previously been used.

5. No listing of journal entries for the year with supporting documentation. No approval process before journal entries made in the accounting software (Peachtree). Comment: this is being corrected.

6. Town does not maintain a fixed asset ledger. Comment: Office personnel insist there is such a ledger. It may be that the town manager didn't understand what the auditor was seeking. In any event, now that the ledger has been located, it turns out not to have included Police Department equipment. This is being added.

7. No computer security controls in place. Comment: Correction of this deficiency is about 50% complete.

8. No approval process for utility adjustments. Comment: Most adjustments are made by Bay River. They are the approval authority. It may be that we should formalize approval of each request to Bay River. Adjustments to water bills sometimes result from misread meters. Policy for making and approving adjustments should be based on water board recommendations.

9. Water extensions not monitored effectively. Comment: this may not be accurate. On the other hand, it might be that this and other water system issues should be addressed by our Water Board. We have had a Water Board in the past, but we seem to have no ordinance establishing it, setting terms of reference for its duties, etc. The last time the board is recorded to have met is more than two years ago.

10. There is no reconciliation process for water payments collected. Comment: This may not be accurate. Since the audit, the town has purchased a cash register module and is using it. This could be another topic for review by the water committee.

11. There is no contract in place with Bay River. Comment: The town has been negotiating with Bay River to correct this omission for several months. As a separate issue not addressed by the auditor, the town needs to negotiate a number of additional inter local agreements or memoranda of understanding with the county, including the Sheriff’s Department and Animal Control.

Bottom Line:
The list of deficiencies is nothing to lose sleep over. The most important of them (except for the cash drawer) had already been identified and were being addressed by the Town Board before the audit began. Most importantly, I think, is the apparent need to reestablish an effective Water Board.

Thursday, December 3, 2009

Audit III

The most heated exchange at last Tuesday's Town Board meeting concerned the draft audit report. It was noted that this year's report identifies 12 control deficiencies and 11 material deficiencies, whereas the previous auditor did not note a single deficiency. Has the town all of a sudden taken a nose dive in its procedures? Probably not. I believe our previous audits for the past several years were inadequate.

What do I know about audits? I was government contracts officer for two government contracting firms and Chief Financial Officer of a private equity firm with a government guarantee by the Overseas Private Investment Corporation. I have represented my firms at audits by the Defense Contract Audit Agency. Been there. Done that.

In early 2008 in open session I questioned the statement in the 2007 audit report that the auditor's review "...would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses." The report went on to say that "...providing an opinion on compliance [with laws, regulations, contracts and grant agreements] was not an objective of our audit, and accordingly we do not express an opinion." I was told by one of the returning commissioners that "this isn't that kind of audit. If we want that kind of audit, we have to pay more." Well, this time we got "that kind of audit" and it cost less.

The previous audit was a whitewash. I am told that the previous auditor sat down with the then town manager and went over some "problem areas." I don't know what they were, because the list was never put on the public record or presented to the board. It should be the prerogative of the board to determine whether shortcomings in compliance require corrective action, not the unilateral determination by the town manager.

It's a good idea to look at any audit or other evaluation with a critical eye. I hope the new board will do that. Not every deficiency is worth correcting, especially in a town this size. But there is no excuse for not making every reasonable attempt to comply with state requirements. In many cases, correcting the auditor's findings is easy to do. In other cases, I believe the auditor is either incorrect or his statement misstates the real problem.

If anyone out there would find it useful, I would be glad to post my item-by-item analysis of the audit report.

The worst mistake would be to simply dismiss the findings of the auditor. This was a good audit. I think future audits by the same firm are likely to become even better, as the auditors achieve greater familiarity with the town's strengths and weaknesses.

Friday, November 27, 2009


Last year the town's audit report was submitted to the state several months late. The North Carolina Local Government Commission was not amused.

Our new town manager made sure this year's report was completed on time. A major factor in on-time performance was the selection of a new auditing firm, Pittard, Perry & Crone, Inc. That firm has provided the commissioners with its preliminary report.

In the report, our auditor identified twelve significant control deficiencies - that is, deficiencies in internal controls that adversely affect the town's ability to make sure our accounts are accurate. The audit also finds eleven material weaknesses - that is, significant deficiencies that might allow undetected material misstatements of the town's financial position.

How long have these problems existed? In most cases, for years. Why didn't our previous auditor find them? They didn't look. They even told us they didn't look. The audit, Seiler Zachman and Associates explained, was "... not for the purpose of expressing an opinion on the effectiveness of the Town's internal control over financial reporting.... and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses." Why we accepted such an audit is beyond me. My only excuse for the 2007 audit is that it arrived so late it was no help anyhow in dealing with the next budget cycle. In the course of working on the current budget, this commission uncovered a number of the problems noted by our new auditor.

Randy Cahoon is already busy correcting most of these longstanding deficiencies.

Sunday, October 18, 2009

A Good Audit

I'm not a trained accountant, but I once served as Chief Financial Officer of a private equity fund and as government contracts officer of two different companies. I have been through audits before, and was beginning to lose confidence in the vigor of the town's recent audits.

Last summer, when I learned we would be able to hire a new auditor to review the town's accounts and procedures for the fiscal year that just ended, I called for a special board meeting to change auditors. We don't yet have the written results, but preliminary indications are that our new auditor is doing a fine job. He has already uncovered a number of areas where the town's procedures did not meet the requirements of NC general statutes, and other areas where he has suggested improvements.

A good audit is not one that takes a cursory look at the books and declares "you have no serious deficiencies." Rather it is one that takes a thorough, probing look and makes concrete suggestions. We are undergoing a good audit. I look forward to the written report.