Welcome to Mile 181

Mile 181 on the Atlantic Section of the Intra Coastal Waterway brings you to Oriental, NC. Heading North or South on the ICW will take you to other interesting places. At Moorhead City, turn left into the Atlantic Ocean and go anywhere in the world. Many residents of Oriental have followed that path.

I expect this blog to focus on issues and interests important to the Town of Oriental, to Pamlico County, Pamlico Sound and Eastern North Carolina. Like the body of water at our doorstep, though, these concerns can lead offshore and to other exotic ports of call.

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.

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).

ORIENTAL 2008 AUDIT COMMENTS

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.

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.

December Meeting of Commissioners

Last night (Dec. 1, 2009), the outgoing commission cleaned up some remaining loose ends, County Commissioner Paul Delamar III swore in newly-elected commissioners, and the new commissioners began their own term.

There were four loose ends: outgoing commissioners approved November minutes of regular and special sessions; commissioners formally opened some previously closed minutes and agreed to the eventual release of minutes relating to South Avenue litigation; amended the town's fee schedule to include a parade permit fee of $10 (to cover the cost of insurance rider for the event); and the commissioners granted formal authority to the mayor to exercise day to day supervision of the town manager. Commissioner Styron asked why the board was opening closed minutes, which the town had never done in the past. I explained that the County Commissioners had begun the practice and I thought it appropriate for more open government. Mayor Sage observed that it removes some of the mystery surrounding government actions. The town's attorney explained that many of his clients do this and expressed the view that it should be done every six months or so.

After the new board assumed office, the most interesting exchange took place when Commissioner Warren Johnson drew attention to the audit report, recently received by the town in draft form. Commissioner Johnson found some of the findings disturbing. This will undoubtedly be addressed in more detail at the January meeting when the auditor will formally present the report to the board.

Leadership and Management

There seems to be some confusion about what the Town Board of Commissioners actually does. The Board is, under NC General Statutes, the "governing body." That doesn't mean that the commissioners as a body or any one of the commissioners as an individual has any administrative role in the day to day operation of Town Hall.

The Board of Commissioners is a legislative body. It makes the rules - passes ordinances, approves the budget, makes policy; but has no operational function. The Board has hiring and firing authority over the Town Manager, but no direct authority. Its only authority is that of oversight.

That sometimes leaves the Town Manager in an awkward position. Does he have five bosses? What if one commissioner says one thing and another commissioner says the opposite?

The Mayor also lacks administrative authority, at least by statute. He has only the authority to chair meetings of the Board of Commissioners. So how does the Town Manager know what to do if a problem arises between Board meetings?

Experienced managers often navigate this maze by establishing informal arrangements. Sometimes that works. Another possibility is to establish a formal arrangement. The Board of Commissioners, for example, has the authority to designate the Mayor as the person the Manager should consult for guidance on day to day matters. The Board would always retain the authority to override the Mayor, but such an arrangement might alleviate some confusion.

What the Board doesn't do is enforce ordinances. That is the responsibility of the Town Manager, through his heads of department.

Every leader or manager has his or her own style of leadership. In more than fifty years managing various size organization, both military and civilian, I have come to some conclusions as to what works best:

1. Positive reinforcement works better than negative reinforcement;
2. Leaders get better results when they seek cooperation and ideas rather than demanding compliance by ordering it, except in extreme cases;
3. Leaders can delegate authority but never responsibility - when a ship runs aground, the Captain is responsible even if he is asleep in his cabin;
4. Effective leaders delegate as many tasks as possible, exercising oversight by intervening only to keep things from going wrong - that's known as "control by negation";
5. Subordinates also need to understand that they are not and cannot be responsible to the degree that the "boss" is.

Transition

Oriental Town Government is in a state of transition. Tomorrow evening the outgoing and ingoing commissioners will gather to establish the agenda for Tuesday's meeting of the Town Board. At that meeting the outgoing board opens and approves minutes (including opening formerly closed minutes). Following that, the retiring commissioners withdraw and the newly elected board will be sworn in.

As of that event, I will no longer be a commissioner, so my blog has to have a new name. The new blog is named for our boat: http://mile181.blogspot.com. I plan to post my first blog entry that evening. Once I figure out the system, I'll try to link the two blogs so those who wish to do so can continue to post comments on either site.

I may have lost an election, but I haven't lost interest.

Audit

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.