Monday, June 14, 2010

Smooth Operators

The audit report

The comprehensive annual financial review (CAFR) for fiscal year 2009 of Goochland County presented to the supervisors on June 1 is both troublesome and reassuring. The report, prepared by the auditing firm of KPMG, examined a wide range of documents to reach it conclusions.

Only a handful of people attended the meeting, so please read the report and listen to the recording of the meeting. The full CAFR is posted on the County website, www.co.goochland.va.us, and the recording of the meeting —the CAFR was presented during the evening session — is on the left side of the supervisors’ page.

After going back several years, in some cases to 2001, the auditors have put the county’s books on sound footing. Their recommendations to improve systems and procedures are currently being incorporated into county operations. That process should be complete by the end of October.

In the future the county financial picture will be better organized and more transparent, providing a sound footing for the hard decisions to come.

The audit report painted a picture of, at best, a dismal dysfunctional management style with few internal controls or systems to ensure proper handling of the county’s money.

It’s hard to say whether the lack of comprehensive and cohesive fiscal oversight is the result of incompetence and inattention by the previous regime of county management or a strategy to obfuscate mischief. It is clear that citizen trust placed in those responsible for ensuring good stewardship of county money was misplaced.

People wonder whether the supervisors ever bothered to ask questions about how the county’s financial affairs were managed or were snookered by smooth talkers running the county on their behalf. Did the supervisors enable or encourage the previous regime to create this mess?

Clearly, those elected to office before 2007 are uncomfortable about the results of the audit and it seems as though they want to sweep the dirt under the rug and move forward.

Except for Jim Eads, District 5 and William Quarles, Jr. District 2, who were employed by large companies, all of those who served on the board of supervisors in the past decade had experience in running small businesses.

No one expects supervisors to put on green eyeshades and chat about Government Accounting Standards Board (GASB) regulations in detail. They should have enough understanding of basic financial management, however, to ask pertinent questions and insist on rotation of accounting firms used to perform county audits.

The county retained an outside firm, RFCA, to audit its books every year for close to a decade. That same firm failed to notice, for about four years, the stale checks found in the utility department. This firm also neglected to include a $21.3 million item for wastewater treatment on the county’s financial statements since 2002.

A very troubling pattern discussed in the audit report is the failure of the county to update its accounting procedures, such as they were, to reflect the increasing complexity of Goochland’s fiscal affairs as the county grew.

The Capital One campus was lured to West Creek with a goodie bag of incentives, funded in part by the governor’s opportunity fund for about $3 million. This involved credits and rebates among the state, Capital One, the County and the Goochland Economic Development Authority. This activity is legal and above board, but requires far more sophisticated accounting than the county had ever used.

Why didn’t RFCA sit down with whatever part of county management was responsible for monitoring those transactions and explain how they were to be reflected in county accounts?

Okay, so they missed it the first year, things happen. But for the next least six years, they never caught it. That just smells bad.

They missed a lot, including a $21.3 million obligation to the City of Richmond for wastewater treatment. As the TCSD was being explained to landowners, who put up their property as collateral for money borrowed by the county, this $21.3 million item was never mentioned.

Everyone believed that the cost of building the TCSD infrastructure was the $62+ million borrowed from the Virginia Resource Authority. Eight years later, we learn that there is another $21.3 million of debt the county is obligated to pay. How do TCSD property owners, whose land was used as collateral for the debt, reconcile that?

The report includes at least 43 restatements; that means that the KPMG audit team found 43 instances where the figures were either incorrect or had been put in the wrong place. Goochland County paid a professional accounting firm and others that missed or made these errors. According to Churchman, KPMG traced these items back several years to fix the errors.

In previous years, according to Churchman, RFCA in essence closed the county’s books for the year then audited their own work. This may have occurred because no one on the county staff had the technical expertise to close the books.

There was not one county employee with an accounting degree. The previous regime, at best, failed to grasp the importance of this deficiency and was unable to understand the impropriety of the same entity closing the books and then auditing that activity.

Churchman stated several times in different ways that this action makes it impossible for an auditor to have the objectivity necessary to perform a proper audit.

Ned Creasey asked questions, which he said were prepared for him by an accountant, and which seemed to have been approved by Chairman William Quarles, Jr. District 2 before the meeting. What justification is there for the board chairman to interfere with another supervisor’s attempts to inform the citizens of the management of county government? (These questions are included below)

Churchman carefully parsed his replies to Creasey’s questions. His responses nevertheless painted a picture of county management and an auditing firm that betrayed public trust.

Additional recommendations made by the report include hiring employees with the necessary skill set to manage the increasingly complex financial affairs of the county.

The audit places Goochland on a sound footing to go forward, but raises questions about the county’s previous management and auditors that cannot go unanswered.

Quarles, Eads and Andrew Pyror, District 1, sometimes collectively referred to as “the three blind mice” seem eager to move forward and ignore the implications of the audit about activity in the past.

That action would not serve taxpayers well. At the very least, the supervisors must investigate legal remedies to recover the cost of the KPMG audit as well as the $434,000 expended to understand the finances of the TCSD.

At the end of the day, the supervisors are responsible for the operation of county government. Failure to pursue recompense from those whose actions led to the deficiencies outlined in the audit gives credence to the belief that the supervisors enabled or were complicit in those actions. Citizens have little trust in local government. The smooth operators need to foot the bill for their deeds.

Questions asked by Ned Creasey (these are about 33 minutes into the recording of the evening session.)

Preliminary Info/Audit planning:

At what amount(s) did KPMG set materiality for the overall audit? Was the overall materiality amounts altered from initial levels during the audit?

Did KPMG alter the nature, timing, and extent of substantive tests in order to address deficiencies uncovered during tests of controls?

When performing tests of controls, were there any areas where controls were absent or not implemented?

What is the typical period of time for fieldwork related to an entity similar to Goochland County?

Material Weaknesses:

According to your draft report, “The existence, magnitude and causes of prior year restatements and current year adjustments are the basis for material weaknesses.” Were there weaknesses that existed in prior year information that no longer existed in the period currently under audit?

Regarding a “Lack of segregation of duties” – does the county have the personnel necessary to properly segregate duties in the departments identified within the report? In KPMG’s experience, would the benefits of increased personnel outweigh the costs?


Was KPMG able to discover the existence of liabilities related to the TCSD by reviewing the minutes of past Board of Supervisors meetings and workshops? A review of all board minutes is a core activity in the planning stage of ANY audit, isn’t it?

Would subsequent debt service payments be an obvious indication of the existence of a liability?

Has KPMG been given a copy of the previous audit firm’s response to proposed restatements of previously reported amounts?

The previous accountant has addressed the proposed restatements in a letter to the county administrator, stating that many of the items noted by KPMG are immaterial in nature. How can we (the B.O.S.) reconcile the difference between what KPMG and RFCA finds to be material?

Further, the previous accountant repeatedly noted that “Management failed to communicate the changes to or monitor the controls over the capital asset listing.” How long would KPMG allow reportable conditions to exist without being addressed by management before qualifying its opinion about fair presentation?

If the county disclosed the discovery of a group of stale checks (on the scale that was discovered in the utilities department) after KPMG issued its report, would KPMG feel compelled to restate or disclose this discovery?

Was there any evidence of collusion on behalf of the former county administrator or other county employees? Is it possible that collusion existed but was not discovered?

Conclusions:
Does KPMG plan on obtaining a representation letter from the county administrator at the conclusion of its field work? Does this representation letter typically include a statement regarding the completeness and accuracy of the information provided by the county?

Is it appropriate to rely on external auditors to manage year end closing procedures?

Does the county now have appropriate documented procedures to ensure complete and accurate accrual accounting? Are the personnel in place to achieve this goal?

Did KPMG find evidence of misappropriated assets?

How often, in your experiences as an auditor, has KPMG (or you personally) come across a previously unqualified report for a period requiring so many restatements of year end amounts and balances?

3 comments:

Anonymous said...

When situations like this mess occur, the buck stops at the top. The Supervisors blamed the former Utility Director and his assistant for the check mess-up. They allowed the County Manager to resign, instead of being fired. They seem to point fingers way down the chain of command and allow the higher ups to bow out gracefully. By attempting to lay the blame as low as possible down the chain, they are clearly attempting to avoid any finger pointing in their direction. Jim Eads, Bill Quarles, and Andrew Pryor control the Board with their 3 votes. The buck should stop at the top. These 3 Supervisors need to show some integrity for once and do the honorable thing, RESIGN! The shady deals that created the TCSD have put the County on the road to ruin.

Anonymous said...

There needs to be legal remedies asked for by Mrs. Warwick. The county's citizens have been bilked by their former County Administrator and by Robinson Farmer Cox Associates. Both should be sued.

And like the previous comment, I feel that those on the board should be held accountable too.

Anonymous said...

And just what responsibility do the citizens of Goochland who voted for these Supervisors, year after year, decade after decade, have for this mess? How much do you want to bet that they all get reelected?

Who can we blame? Where can we point the finger? When people start looking in the mirror, we'll have the answer.

Pat