Thursday, May 8, 2014

Financial State, Part 3 - Confirmations and Corrections

You may have noticed that we have been having some technical difficulties here at the Sun due to an unexpected growth in readership. Linked documents are in the process of being transferred to a new hosting service capable of handling this additional traffic. Needless to say, this has put us a bit behind schedule on publishing new articles, as well as implementing a new commenting system.

I know many of you were expecting to learn more about Resolution 14-03, presented for Council consideration at the May 6 meeting. That information is forthcoming, but first there are a few remaining details about our City's finances that need to be addressed.

After the May 6 City Council meeting, I had an opportunity to speak with Tracey Richardson, our City's finance manager. Despite needing to get home to her kids, Ms. Richardson was more than willing to take time to speak with me about the conclusions drawn in the previous "Financial State of Belle Isle" series of articles.

Belle Isle's Emergency Reserve Fund Balance

So what is our City's true emergency reserve fund balance? The previous Financial State article concluded that we must deduct the overdue impact fees to Orange County from the unassigned fund balance to determine this number. These unpaid impact fees total over a half million dollars.

However, I learned that despite not being specifically listed as a liability in the CAFR, these impact fees are already deducted as a general liability, eliminating the need to again deduct these unpaid impact fees from our City's unassigned general revenue fund. So after deducting non-spendable funds and the funds assigned to be spent over the next four months, $543,735 in unassigned funds remain. This amount is verified on page 13 of the 2013 CAFR and by the Auditor's presentation at the April 1 meeting.

Although $543,735 is higher than the amount concluded in the prior article, it is nowhere near the $1.2 to $1.3 million in unassigned cash reserves reported by Mr. Severns at the November 5, 2013 meeting. (Transcript linked below.) Which explains the auditor's April 1 statement that "you really don't have a million dollars of unassigned revenue. It's only half that amount."

November 5, 2013 Meeting Transcript re: Unassigned Reserves

Can Our City Create Financial Statements?

I discussed a number of questions regarding monthly financial statements with Ms. Richardson. She explained that the "Revenue and Expenditures" statements that the City recently began publishing are the monthly statements that were previously requested by the Council. She explained that these revenue and expenditures statements are the standard form of monthly reporting. If the Council wanted anything further, they would basically be requesting a monthly form of the CAFR, which would not be practical for our City to produce monthly.

As you may recall, one of the "significant deficiencies" described in the 2013 CAFR is that "The City of Belle Isle, Florida does not have controls over preparation of the financial statements which would prevent or detect a misstatement in the financial statements." Although the auditors' wording in the CAFR appear to imply that Belle Isle has no one on staff capable of preparing these monthly financial statements without additional training, Ms. Richardson clarified in no uncertain terms that she currently has the training and experience to create the monthly finance statements required for the CAFR. The only impediment to her producing these monthly statements has been her heavy workload at the City.

I did not ask about the City's plans or timetable for implementing the its stated goal of preparing these financial statements in-house, but I will follow up on this question at a later date.

Although I can't evaluate the accuracy of Ms. Richardson's statements, she gave me the clear impression that she was being straightforward. She offered an open door regarding any financial questions about the City that might come up in the future. Since Mr. Severns has still not offered a single explanation for the statements he made to Council on November 5, it may be prudent to direct any future financial questions to Ms. Richardson, who seems more than willing to openly discuss our City's real financial picture.

A Full and Open Hiring Process

One other point of discussion with Ms. Richardson was the issue of how she was hired. Ms. Richardson was understandably frustrated that people have recently been questioning her qualifications despite the fact that she is fully-qualified for her job. I explained that residents have no way of evaluating whether our City has hired the most qualified candidate for a position when the City does not perform full and open hiring processes.

Ms. Richardson did not debate my assertion that full and open hiring processes would produce more confidence from residents, but she also correctly noted that she was the person hired, not the person doing the hiring.

But while the circumstances of her hiring certainly should not be held against Ms. Richardson, this issue highlights why we need more open and transparent City hiring processes in which multiple qualified candidates are selected and interviewed without regard to their connections with City personnel and their colleagues.

What Does the CAFR Really Audit?

In Financial State, Part 2, I noted that after the financial presentation, the auditor acknowledged to Commissioner Nielsen that a different, more extensive type of audit would be required in order to truly verify the financial state of Belle Isle.

I distilled this information from a longer conversation, in which Commissioner Nielsen asked the auditor whether the audit performed for the CAFR was the type of audit where every transaction is checked between the City's accounting records and the actual bank transactions, invoices, contracts and other financial records. The auditor informed Commissioner Nielsen that the audit performed for the CAFR would not examine every such City financial record, but that the City could request a more extensive audit for this purpose.

Auditor Kelly Leary from the accounting firm McDirmit Davis, LLC offered a formal response to this statement about the depth of the audit performed for the CAFR, concluding that "Commissioner Nielsen has definitely distorted many things." I would expect a professional firm like McDirmit Davis to have a clear basis before making such a statement about one of its clients, but Ms. Leary appears to offer little in this regard. Here is Ms. Leary's statement in its entirety so you can judge for yourself:

"Commissioner Nielsen has definitely distorted many things. I told her that we did perform the type of audit required by the Auditor General but if the Commission wanted a 'fraud' audit or other specific agreed-upon procedures performed, we could do that as a separate engagement. I never said that a 'more extensive audit would be required in order to truly verify the financial state of Belle Isle.'"

Ms. Leary's statement seems to support and expand upon the conclusion that a deeper audit is needed if we want to truly verify our City's financial state. Her statement even gives a name to the more extensive type of audit our Council could request, calling it a "fraud" audit.

Neither Commissioner Nielsen, nor the Sun, has ever questioned whether McDirmit Davis provided the services they were contracted to provide and that they were required to provide by law. The only question addressed has been whether our City should consider contracting for a deeper type of audit - exactly the topic Commissioner Nielsen and Ms. Leary discussed at the April 1 meeting.

All statements made by the City and the auditor appear to support the conclusion that our Council would need to request a more extensive "forensic" or "fraud" type of audit if we wanted an auditor to review each and every City transaction to ensure the accuracy of our City's accounting records. This review is vital if there is any doubt about the accuracy of these records, because they form the basis for the CAFR.

A forensic audit is fully within the purview of the Council pursuant to the City Charter, Section 3.18, which gives the Council control over City audits, including the type of audit, frequency of auditing, and the identity of the auditing firm.

A Final Suggestion

As described above, the City has begun publishing regular revenue and expenditure reports. However, the great majority of our City's Commissioners and residents, including myself, do not have the financial expertise to be able to glean any useful information from those reports.

One solution would be to require brief oral financial status reports from our City's finance manager and/or city manager at each Council meeting. These reports could include all revenues and expenditures over a certain dollar figure, including bids requested and received on all expenses over $10,000, as are required by our City Charter.

These monthly reports would ensure that Commissioners and residents always have accurate, comprehensible, and up-to-date information about our City's financial state, while also guarding against misunderstandings and unanswered questions. Furthermore, this would allow our City to return to its procedure from prior to the appointment of Keith Severns as City Manager, in which the Council reviewed and approved bids on all large purchases before such expenditures were authorized.

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