Chandler’s former chief financial officer Patricia Walker spent well over an hour Friday teaching members of Duncan’s Town Council how to understand financial audits and statements and discussing the town’s FY20 finances.
The town hired Walker earlier this year after the auditing firm of Colby and Powell expressed concerns about the town’s dwindling savings. Council members wanted Walker to investigate the town’s situation and educate them as to what they should be looking for when reviewing financial documents and creating budgets. As a result of her findings, the Arizona Municipal Risk Retention Pool and the Arizona Attorney General’s Office have launched their own forensic and fraud investigations.
Walker, who spent 17 years with the City of Chandler, is an independent consultant that came highly recommended by the League of Arizona Cities and Towns.
Appearing telephonically, Walker took council members and Interim Town Manager Philip Cushman through a lengthy PowerPoint presentation. She explained towns are required to have audits conducted once every two fiscal years, but cautioned them that it is not an auditing firms job to offer an opinion on whether a town is in good financial shape or not. Nor is it a firm’s responsibility to comment on the effectiveness of a town’s internal controls.
Auditors determine if financial statements are true and fair, but they only review what data they are provided, Walker said. Only 4% of all uncovered frauds are discovered by auditors, 68% are found through tips and 20% are found by accident, she said.
Eight percent of all fraud cases are found through monthly reconciliations, Walker said.
After conducting her investigation of Duncan’s finances, Walker reported in August that none of the town’s four bank accounts had been reconciled since January.
On Friday, Walker took the council through the town’s balance sheet, statement of revenue and expenditures, statement of net position and budgetary comparison schedule.
At the end of June 2020, the town’s total fund balance was in the negative by $168,529, documents show.
Walker pointed out that in FY20, the town spent $88,000 less than anticipated, but fell nearly $212,000 short of what was expected in revenues. During the same year, the town had to take $142,000 out of its general fund to help the town’s water department. When questioned about that transaction, Mayor Anne Thurman and council members Deborah Mendelsohn and Jill Wearne said there were never any discussions about that transfer, nor whether the water department was expected to pay the general fund back.
Council member Alex Blake and Vice Mayor Valerie Smith were unable to make the meeting.
Walker said it’s clear the water department rates are not covering its expenses and although the town recently raised rates, she suggested the town ask the Water Infrastructure Finance Authority of Arizona or some other organization to conduct a rate study. She also suggested the town get help to determine exactly much the town needs for its operating and debt services and how much needs to be in reserve.
Walker endorsed Mendelsohn’s idea of bringing engineering and energy services company Veregy into those discussions since the company is already looking at ways to improve the town’s water and wastewater systems and is seeking WIFA grant funding.
Because the FY21 and FY22 budgets were created the same way FY20’s budget was created and it was so far off, Walker told the council she is worried about the FY21 audit.
She also told them it’s crucial for them to be vigilant when maintaining their books this year.
“You’ve really got to track the revenues against expenditures because I think they were inflated numbers,” Walker said. “Yeah, it’s really good to tell the council ‘Hey you’ve got all of this money to spend,’ but if the money doesn’t actually come in you’re in trouble. In ‘20 luckily your expenditures were less than what they were budgeted, but not as much as your revenues were short and that’s where you get into trouble.”
If the town keeps using its savings, eventually it will run out, Walker warned.
“You’re not bankrupt and the CARES Act will probably save you this year in ‘21 and the relief money will save you a little bit more in ‘22, but there are restrictions on how you can spend that,” she said.
When Mendelsohn asked Walker what could be done to make sure significant problems don’t slip through the regular audit as has been happening, Walker said the town needs to implement internal controls to make sure “there’s always another set of eyes looking at something at something and signing off on something, that there’s not one person doing everything.”
Such controls pertain to payroll and cash receipts, etc., Walker said. Right now, the town doesn’t even have a way of tracking incoming cash or checks, she said.
Walker pointed out that if a forensic audit shows more than $100,000 of government money has disappeared as a result of fraud, a conviction would result in prison time.