State Audit finds city financial controls lacking, but no evidence of intentional misstatements

By Harry Gatjens

The City of Edmonds received its exit interview for the 2010 Audit on Wednesday with some “findings,” but no evidence of major misstatement of the City’s financial position. The audit was conducted in summer 2011 and covered the 2010 fiscal year.

The exact points and matters covered are summarized here in notes compiled by Edmonds resident Ken Reidy, a frequent observer of city government, that were sent to My Edmonds News. (For those not familiar with audit reports, “findings” are the second-most serious type of problem that the state can point out during an audit.)

One finding on the Financial Statements Audit Report:
The City’s controls over financial statement preparation are inadequate to ensure accurate accounting and financial reporting.

One finding on the Accountability Audit Report:
The City does not have adequate oversight of financial operations to safeguard public resources.
Three specific areas were mentioned, cash-receipting, payroll and change orders

Two Management Letter items, related to improper use of restricted revenues for flower baskets, etc. and payment of unearned pay. (This is related to former Mayor Mike Cooper’ negotiated leave payment with his former assistant Kim Cole, which not allowed under City or state law. Although that leave payment occurred in 2011, the auditors included it as part of the 2010 report because an anonymous citizen asked them to investigate it while they were conducting their 2010 audit.)

Twelve Exit Conference items:
-Open Public Meetings Act (10 executive Sessions entered into before City Council meeting was called to order)
-Contract Payment Support (City cannot ensure Fire District 1 is paying Edmonds the correct amounts due)
-Court – Manual Receipts
-Court – monthly audit report review
-Court – Bail payments
-Meals with Meetings
-Minutes documentation (relates to not following code when hiring department directors)
-Donations policy (Ordinance 3466 passed in 2003 does not comply with RCW 35.21.100)
-Transportation benefit district (creation of this District not in compliance with RCW 35.21.225)
-Bid law compliance
-Parks Department – cash receipting
-Utility Adjustments – (a former finance director exempted a citizen from paying storm water charges)

The most significant point was that the Finance Department had a lack of a internal controls in the area of cash receipt and treasury function. Also, there was a lack of separation of duties and authorization of payroll processing. These two deficiencies allow the possibility for misappropriation of funds, although no evidence of such was found.

The Finance Department has added two employees this year so that duties could be reassigned to alleviate these issues. However, since the change was not accomplished until 2012, expect the same finding for 2011.

It was also noted that some easements were recorded on the City’s books as “land,” but new regulations require they should be classified as “intangible assets.” Again, this issue was attributed the fact that reduced staff had insufficient time to be trained on the new regulations.

There was also a “timing” issue, where a December 2009 item wasn’t included until 2010.

In addition, the auditors found that the City’s procedure for change orders (translation: Haines Wharf Park) was not clear, but noted the City Council had resolved this issue last September.

The auditors also pointed out that certain items (flower baskets and other beautification projects) were paid out of REET (Real Estate Excise Tax) funds that are supposed to be used for Capital projects, and these did not fit under that category.

The city also needs to do a better job of documenting its meetings and actions and following previously established policies, the auditors said.

Just one point to note: the former Finance Director who gave the relief on the storm water charges did this more than five years ago. The amount not collected over the period was $592.75.

There were four items from previous audits that the City has not yet resolved. They included separation of duties and receipting in the Municpal Court, lack of a clear procedure for reallocating donations outside of the donor’s intent, using REET funds for non-REET items  and improper allocation of certain costs.

Overall, while there were shortcomings noted about the City’s financial controls, the majority of the errors were small and didn’t involve a significant amount of money. That being said, the potential is there for significant problems if the controls are not fixed. The City had responses indicating that the “system” errors had been remedied or were in the process of being remedied.

Harry Gatjens is an accountant who writes about City government and budget issues for My Edmonds News.

  1. To clarify the Management Letter discussion of “Unearned Pay”, the Management Letter includes the following:

    “As a result, three employees who had not completed their six-month trial period were paid $9,800 for 152 vacation hours plus related benefits for vacation leave not yet earned or otherwise approved by the Council. Paying for unearned leave is prohibited by the State Constitution and violates Municipal Code.”

    I did not hear any mention that this was related to Kim Cole. If the situation does involve Kim Cole, two other employees are also involved., The Management Letter clearly states THREE employees. The amounts paid out averaged $64.47 per hour. $64.47 per hour times 40 hours times 52 weeks equals annual pay of over $134,000. As a result, it would appear that the THREE employees involved were amongst the City’s highest paid employees.

    Another reason I would be surprised if this Management Letter item involves Kim Cole is that the State Auditor represented the following to me in an email dated April 3, 2012:

    “I can let you know that we did not review the Haines Wharf project during the 2010 audit because of pending litigation. Our office typically does not review areas with pending litigation because we need to wait and see what the Courts decide.”

    Hence, if the State Auditor is consistent related to reviewing items that involve pending litigation, it will not review the Kim Cole situation until the Courts have made their decision on her legal action.

    With the identity of the THREE employees unknown, I’d like to discuss the fact that the State Auditor has just concluded that the City took action PROHIBITED by the State Constitution which also VIOLATED the Municipal Code. That is a very strong, significant statement by the State Auditor. Certainly, there must be accountability for such action. Whose job is it to hold the responsible party accountable? This is a critical point to grasp. I believe the City’s Code is clear related to this responsibility, but I’d like to know Citizen’s thoughts on this.

    In addition, should the three employees be required to reimburse the City for the money they were not entitled to? What do Citizen’s think regarding this?

  2. The Management Letter discussion of “Unearned Pay”, also includes the following:

    “We also found the City paid one employee for 39.06 hours of sick leave without documentation to show the use of sick leave complied with City policy, such as verification showing a related family member was ill. During this absence, the City also paid this employee $139 or 3.66 hours in unearned vacation leave.”

    Based on the hourly pay rate, this employee earned approximately $79,000 per year. It appears possible that this employee is one of the THREE employees who were paid for unearned vacation leave.

  3. There is much information to digest and discuss, but I will make one additional comment before trying to find some time to study the State Auditor’s reports, etc. in more detail. It relates to the following from Harry’s article:

    In addition, the auditors found that the City’s procedure for change orders (translation: Haines Wharf Park) was not clear, but noted the City Council had resolved this issue last September.

    The discussion of Change Orders takes place in the Preliminary Draft of the SAO Accountability Audit Report, which states as follows:

    “During fiscal year 2010, the City engaged in $2.3 million in public works projects. (I have requested SAO verification of this amount as it seems small to me) The City has not developed policies and procedures over monitoring and approval of change orders to ensure that all change orders are necessary, for a reasonable price and are within the original scope of the project.”

    One of the three related recommendations made by the SAO is for the City to establish policies and procedures for change order approval, as suggested by the Washington State Auditor’s Office (SAO) performance audit report on change order practices. This is a 58 page document published by the SAO on January 10,2012.

    The City implemented its new change order policy on January 23, 2012 as part of the City’s update to its purchasing policy that was approved by the City Council on that evening’s Consent Agenda. The Council worked hard to establish a simple policy that works for all situations. I’m not sure if this new policy has been codified. It would be interesting to review our new policy in relation to the SAO’s performance audit report on change order practices.

    I’ll conclude by saying again that the State Auditor represented that they did not review the Haines Wharf project during the 2010 audit because of pending litigation. Hence, I do not think this finding related to Haines Wharf. If it didn’t relate to Haines Wharf – it would be nice to know what it did relate to.

  4. Ken, just as a followup to some of your comments. After the presentation I specifically asked the auditor if the employee issue included the former Mayor’s assistant and was told that it did. There may have been others but they did confirm that she was at least one of them.

    As to what happens about the money, I was told that is purely up to the City Council. I asked if the money just got written off as a mistake or if they should try and get it back. I was again told thta is up to the Council’s discretion. As there is still litigation involving this situation it might be best to consider this amount when settling, I don’t think it would be wise to bring it up as a separate issue.

    On the change order issue while I did not specifically ask if it covered Haines Wharf, it was a 2010 project, currently on the books for $2.3 million.

    I think both issues were brought during the 2010 audit as the audtiors were specfically asked to look into those issues, one by a council member and one by a private citizen, while the audit was on-going.

    Outside of those points I take no issue with your comments.

  5. With Cole identified as one of the three employees who received unearned vacations, it would be interesting to know who the other two are. As Ken reported above, the 152 vacation hours averages out to $64.47 an hour. Cole’s pay was $37.98 an hour. So the other two employees, or at least one of them, was paid more than $64.47 an hour. I have a pretty good guess about who they are, but we need to stick to facts here. And I should also remind everyone that the three employees are not to be blamed for the apparent violation of the city’s personnel policies.

  6. The auditor’s statement about the three employees is a little ambiguous. I’m assuming what likely happened is that the three employees were allowed to take vacations before the hours were earned, as opposed to being paid for vacation hours that were not used for vacations. If I’m right, the only cost to the city would be for the hours used by any employee who left the employment of the city before the hours that had been used were eventually earned.

  7. Excellent points Ron, and you are very correct that the three employees are not to be blamed . . .

    The Management Letter states the following:

    “The Mayor negotiated with employees during the hiring process to allow leave that did not comply with the City’s personnel policies. The Mayor was not aware City policies and Municipal Code required the Council to approve this leave.”

    Hence, the Mayor is responsible and the mistakes were apparently made during the hiring process for three different employees. We had two different Mayors during the audit period of 2010.

  8. Harry, regarding Haines Wharf and Change Orders, please simply consider the Auditor’s April 3, 2012 email to me which stated:

    “I can let you know that we did not review the Haines Wharf project during the 2010 audit because of pending litigation. Our office typically does not review areas with pending litigation because we need to wait and see what the Courts decide.”

    Based on this, I believe it reasonable to conclude that the Change Order Finding related to different projects. If not, I guess it is possible that I was misinformed on April 3rd.

  9. I think perhaps you should all slow down and breath. The practice the auditor wrote the city up for was a long standing practice in Edmonds and I am sure other cities that predates 2010. when the auditor raised this issue, the interim finance director, the new finance direcctor and I all tried to convice her no one got paid for work that was not performed. When the auditor brought this to our attention Mr Tarte reviewed all the records to insure we were ok and we were. When I came to Edmonds the HR Director and the city attorney both confirmed that it was common for employees to get advanced vacation as a part of the hiring agreement. People were in fact able to use vacation before it was accure, but they all signed agreements understanding that it was to be paid back if they left the city prior to accrual. NOT one of the Directors involved or the Mayors assistant owe the city a stinking dime. This is a case of an over zelous auditor. Oh and by the way there were people in 2009 and before that got the same benefit and the city was never questioned.

  10. To clarify the article above, the State Auditor did not mention Kim Cole by name. I asked if the Unearned Pay item involved “the Mayor’s assistant” and was told yes.  The hyperlink to the “negotiated leave” article included Kim Cole’s name in the article’s title.  This may have caused some readers to believe Kim Cole was referred to by name by the State Auditor, but she was not.

  11. Former Mayor Cooper – thank you for your long valuable service to our community. It is appreciated by many.

    I’d simply like to request that everyone consider the position these types of situations puts the average citizen in. Citizens are told by the State that the City took action prohibited by the State Constitution which also violated the Municipal Code. Can I simply ask what would motivate the State to make that representation if it isn’t true? Why would the State Auditor be overzealous?

    It is very unfortunate that citizens apparently have to try and figure out who is right – the State or the City? Please understand that it is reasonable for the citizens to expect the State Auditor to be correct.

  12. Well I would expect that this issue is an exception and not the rule, as obviously the city needs to be governed by policies as opposed to practices.

  13. Every year since 1970 my real estate mortgage and escrow companies went through
    an annual audit by the dept. of financial institutions. Every year they came up with 8 or
    10 things we could do to be in better compliance. In the past 6 or 7 years new rules
    were put into place as fast as we could comply with them. In the first 30 years we looked forward to the audits as they were a way to get clarification yearly on how we were doing. In the last 7 years as the State ran out of money they started slapping on outrageous fines for minor infractions. The new regulations are hard to keep up with.
    To my point. OK a company the size of Edmonds needs to be in compliance. WE have had lots of changes in our finance dept that should allow us now to stay ahead of the game. We have more over site on the council then at anytime in my previous memory.
    My first and last thought is about intent. We have never had people with the intent to do illegal things and/ or ripoff our city. I know the first rule is that thou shall not tempt

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