Thursday, February 28, 2008

County audit a ‘dramatic report’

By James Robinson
Staff Writer

Government auditors presented a preliminary draft of the county’s 2006 financial statements to the Board of County Commissioners Monday, and the findings indicate the financial train wreck revealed in the 2005 audit report persisted through the following year — although key players connected to the audit process said they weren’t surprised.

Al Bledsoe, a member of the Citizen’s Financial Advisory Task Force who has followed the county’s forensic and government audits closely said, “It’s not surprising that you have these results. The numbers were bad in 2005, and nothing had been done since then.”

Karla Willschau of the auditing firm Wall, Smith, Bateman & Associates presented the preliminary report to the board — Willschau anticipated that a final audit report would be ready for submission to the state by Wednesday — and said the 2005 audit had revealed, that virtually “everything was wrong” with the county’s finances and financial practices, while 2006 audit results showed that those conditions remained the same.

For example, the 2005 audit listed a number of significant problems, such as overspending, a lack of internal controls, difficulties managing internal service funds, and a failure to reconcile accounts and fund balances between the treasurer’s office and the accounting general ledger. To compound the county’s financial problems, many of the same issues were raised in the 2003 and 2004 audit reports, although apparently little, if anything, was done to correct the organization’s errant financial course.

In the 2006 report, the document details a litany of financial horrors that had continued unchecked since 2005, and which resulted in a 2006 “disclaimed audit report,” and “no opinion on county financials.” (Willschau made the same statements during last year’s 2005 audit.)

For example, as a result of poor or nonexistent internal controls, “at Dec. 31, 2006, all of the county’s fund general ledgers were incorrect and required the attention of an outside accounting firm to reconcile the balance sheet accounts which resulted in numerous material adjustments.” Many of which Willschau said, balanced the books, yet contained visible errors and unclassified revenue and expenditure balances, which will require further work and cleanup.

In addition, the county violated state statute on at least two occasions. According to the audit, the first violation occurred when the county ran a $3 million dollar deficit fund balance or net asset condition across a variety of funds. And second, expenditures, also across a variety of funds, exceeded revenues by $3.37 million. Worse, the approved 2006 budget already showed expenditures outstripping revenues by nearly $2 million from day one, however the final 2006 analysis indicates spending went far beyond the budgeted overspending, and hindsight shows many of the numbers found in the 2006 budget are likely far from accurate.

Willschau said another key issue with the county’s financial troubles in 2006 was the improper management of internal service funds, which Willschau said should be a “break even proposition.”

Not so in 2006.

According to the report, internal service funds such as fleet, nutrition and the county’s self insurance fund contributed $1.9 million to the $3 million dollar deficit.

“That $1.9 million has accrued here to the great disservice of the county. Internal service funds have made accounting here unduly complex. Get rid of them.” Willschau said.

The airport also produced its own share of questions with the preliminary audit report indicating that there was $1.7 million in excess spending at the airport. Although it is unclear if the overage was truly the result of overspending or the mis-classification of funds, Archuleta County Finance Director Don Warn said additional audit work and staff research would help solve the airport, and other deficit fund balance, puzzles.

In summarizing the county’s financial statement to the board, Willschau said, “All I can say is there are a lot of strange numbers in these financial statements. You have to take them with a grain of salt. They are not correct. They are the best we could come up with.”

Through the county’s recent financial history, a failure to reconcile accounts appears to have played a major role in the organization’s financial demise. However, Willschau said, “Although there are some things that have gone wrong, there are some things that have gone very right. The treasurer’s office has always reconciled cash. It’s the only place in the county where cash has been reconciled,” but Willschau said that alone was not enough.

Although Bledsoe’s comment might make it sound as though the county has done nothing to rectify problems since it’s abysmal financial state was revealed in the 2005 audit report, it is critical to note the timetable required for audits, and the county’s adherence, or lack thereof to that timetable and key factors related to the escalation of the crisis.

In the case of the county’s annual, state mandated audit, the report is due July 31 — seven months after the close of the county’s budget year. State auditors typically provide a 60-day grace period after the July 31 deadline, yet, beginning in 2003 the county has failed to meet audit deadlines with grace periods for each consecutive year since.

For example, the county missed the 2003 audit deadline of July 31, 2004, and did not submit the audit until Feb. 9, 2005. The delay forced the state to freeze the county’s use of its property taxes and delayed awareness of financial problems looming on the horizon.

Then, for the 2004 audit, the county missed the July 31, 2005 deadline again, and the state did not receive the audit until Feb. 23 2006. Again, the delay resulted in a property tax freeze and furthered delays in recognizing growing financial problems.

For the 2005 audit, the trend continued. July 31, 2006 came and went, and the state did not receive the report until April 20, 2007, and again Archuleta County’s property taxes were frozen.

By that time, a financial juggernaut was bearing down on the county and the pressure forced the organization to cash its last $1.2 million held in certificates of deposit to pay special districts. In addition, fluid reserves had been vaporized, and the county was forced to tap into a $500,000 line of credit. At the time, finance staff estimated cash flow shortfalls of $1 million.

By May, county staff were focused on damage control in an attempt to survive the year without going bankrupt. The task included a series of deep staff, program and budget cuts. To exacerbate the situation, the county lacked a finance director — former finance manager Bob Burchett was fired in mid-May — and former Archuleta County Administrator Bob Campbell, key department heads staff and members of the Citizen’s Financial Advisory Task Force struggled to nail down mercurial fund balances and an ephemeral cash flow situation.

And now, although the 2006 audit is near completion, it too comes months behind schedule, leaving finance staff playing a frantic game of catch-up and tasked with managing day to day affairs while stitching together bits of evidence that will help future auditors understand the county’s cryptic financial past. In fact, only with the November arrival of finance director Don Warn has the county been able to begin addressing many of the organization’s long term financial issues outlined in four years of audit reports.

For example, Warn presented the first “budget-to-actual variance report” to the Board of County Commissioners during their regular meeting Feb. 19, and Warn intends to provide reports detailing the county’s financial health on a monthly basis. In addition, Warn and finance staff have begun drafting a cash handling policy, an internal controls policy and a purchasing and procurement policy, all of which are unprecedented in the annals of Archuleta County’s financial history. (Warn has said he intends to bring the policies to the board in the coming months for adoption and implementation.)

But Warn is just one staffer, and Willschau warned that limited county finance staff, high departmental turnover, the inherent difficulties of balancing the county’s books after years of mismanagement and audit delays, including the delayed completion of 2006 report, will likely create a new series of challenges to timely completion of the 2007 audit.

To that end, Willschau said her firm will not be able to return for the 2007 audit until late 2008, and in light of the challenges related to auditing Archuleta County, her firm may opt not to return for a third audit at all.

“There’s no way we could get back here by July 31, 2008 to do the 2007 government audit,” Willschau said, and added that the county will not be ready for the undertaking, nor will her firm.

Although Willschau and staff from Wall, Smith, Bateman & Associates have made headway in unraveling the financial troubles found in the county’s ledgers, she warned that many of the conditions discovered in the 2006 audit will have likely persisted through 2007. Thus she offered the following recommendation.

“The reconstruction and correction of 2007 accounting records is a major undertaking and will be very time consuming. In order to prevent 2008 accounting records from repeating this cycle, we recommend that the current finance director’s attention be focused on the 2008 fiscal year and the county should consider hiring an accountant to assist in the reconstruction of the 2007 accounting records.

“Give Don what he needs to keep him here and keep him happy,” Willschau said.

With just $38,587 separating revenues from expenditures in the 2008 budget, the county may be hard pressed to find the cash necessary to secure additional finance department staff.

According to Warn, grant funding may be available to help fund the position, although he said the grant contract and scope of work are not finalized and must ultimately receive board and Department of Local Affairs (DOLA) approval. Warn said the aforementioned grant is separate from other DOLA funding used pay Clifton Gunderson LLP for their audit work.

But beyond approving or denying grant requests and with a tight budget, the board faces a number of key financial questions from a variety of competing issues such as roads, the airport, parks and recreation and planning, the outcome of which could, or not, set the foundation for rectifying years of debilitating financial mismanagement.

“In my professional experience, this is a pretty dramatic report,” said Archuleta County Administrator Greg Schulte. “We have our work cut out for us.”