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Three things you need to know about the city’s last financial audit

Last month, Richard Dinolfo, a Certified Public Accountant, completed an audit report on the city’s finances from July 2012 to June 2013. Although the city has made significant progress with catching up on the filing of it’s NY State required Annual Update Documents (AUD’s), the report showed that there are still problems that have yet to be fixed. After reading the audit report, talking with Dinolfo, as well as Controller Matt Agresta, I’ve come away with three main points that I think are needed to be understood in order to gain a little clarity in what continues to be a somewhat murky situation.

1. The audit satisfied the requirements of the federal government in order to continue receiving federal funds, however the audit offered no opinion on the rest of the city’s finances because of “material weaknesses.”

Every year, the city is required to conduct a “single audit” which only looks at what federal money comes in and how it is spent. The city risks losing its federal funding if these audits aren’t completed. Because of the lateness in preparing the Annual Update Documents (AUD), which has to be completed prior to a “single audit,” Agresta said he has filed numerous requests for extensions in order to keep the funds coming in. Now that the single audit for 2013 is complete, that is a step forward.

However, even though the audit found no “material weaknesses” in the “internal control over financial reporting” for federal programs, the audit states that it offered “no opinion” on either the federal expenditures or the rest of the city’s financial records. The audit indicated that there were material weaknesses found in regards to the city’s overall finances.

Material weaknesses are defined in the audit report as “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that material misstatement of the City’s financial statements will not be prevented, detected and corrected, on a timely basis.”

So what does that mean? I’ll delve into that more in a bit. But first, I think there is an important point that needs to be made so that we understand the context of all of this.

2. The recent audit looked at the 2012 – 2013 financial information only and the problems it identifies does not necessarily reflect current operations.

The audit report points out problems with the 2012-2013 financial data. The report summarizes the problem stating, “The city transitioned to a new accounting software system effective July 1, 2011. From the initial set up of the new system, numerous discrepancies were noted and financial information produced from the system was not accurate. As of the date of this report, the accounting system still contained numerous errors that need to be corrected.”

This statement may give some people the impression that nothing has improved, or that the problems with operations in the controller’s office still persist.

However, the report also acknowledges, “A new City Controller was elected in November 2013 who promptly began the process to correct the inaccuracies in the accounting system to produce reliable and timely financial reports in the future.”

During an interview last month, Agresta outlined the steps he has taken since his election in November 2013 to follow the corrective action plan which was approved by the common council in 2014. For his part, Agresta said he has obtained training for himself and staff on the computerized accounting system, created a separate bank account for capital projects to reduce the chance of co-mingling funds, and kept the common council updated with monthly reports on the city’s financial standing.

Back in April 2014, Lauren Poehlman, a CPA who was hired to work on reconciling the city’s capital projects account, as well as to train staff in the controller’s office, reported to the common council, “Overall, with the new system, it seems as if the day-to-day operations are flowing through with your current system very well.”

Agresta said he expects that the financial records for 2013-2014, which would reflect the time period at which he was in office, should be accurate enough for an auditor to give an opinion. Last week, Agresta said he hopes to finish the 2013-2014 AUD within days, at which point the audit of those years can begin. However, he also said he does not expect the audit to be completed until sometime in November. So unfortunately, an independent, third-party confirmation of his work probably won’t be available before the election.

If the 2013-2014 AUD is successfully filed this month, it will – briefly – be the first time in several years the city has been up-to-date with its required filing, at least until the 2014-2015 AUD is due at the end of the month.

However, it’s clear from the audit report that the AUD doesn’t tell the whole story.

3. Even though the 2012-2013 AUD was accepted by the state, inaccuracies in the details of the financial records for that time period are still present.

In his report, Dinolfo said he was advised of deficiencies in the city’s financial records after the 2011 transition to the new accounting system, and at the time, nothing had been done to correct them.

In the report, Dinolfo states, “The current staff in the City Controller’s office utilized the uncorrected information from the accounting system to prepare the [AUD] for the year ended June 30, 2013 that was submitted to the Office of the State Comptroller March 3, 2015. Consequently, the uncorrected information in the accounting system affected the accuracy of the City’s financial statements.”

I asked Agresta directly about this passage in the report.

Agresta acknowledged that inaccuracies in the previous years’ records still persisted, but stood by the numbers reported in the AUD as true to the best of his knowledge.

“In terms of actual monies coming in and monies coming out, all of that was reconciled to near 100% accuracy,” said Agresta.

Addressing the lack of an opinion on the city’s finances by the audit report, Agresta said, “Trying to do a full-on audit would not be useful, because he’s not going to be able to justify what’s in there. He might be able to say yes, the total amount of money that came in is accurate and so is the total amount of money that went out. But that doesn’t mean your records of all those transactions are accurate.”

“When you say ‘accurate’, you mean how they’re categorized?” I asked.

“How they’re categorized, how they’re booked, if it’s booked to the correct receivable year or not,” said Agresta. “But either way, if it’s accounted for, we’re saying that yes, we can say that all the money that came in and went out, we have it booked. But it may not be booked where it’s supposed to. So going through all of these lines and saying – give me the back up for this, give me that back up for this, is not going to be useful, because it was done incorrectly and we didn’t have a team of accountants in here going through everything line by line for the previous two years.”

“That’s what we’re trying to do for the year we are in now. So that [an auditor] can do a complete audit, we can give him the backup for everything that we’re saying is in there,” added Agresta.

I asked Agresta to put the situation in terms more familiar to someone whose only experience with accounting might be keeping track of a checkbook.

Agresta explained it this way: “Pretend you have your checkbook, and you go over three years, and you mark down 85% of the stuff that you did, whether it’s money in or money out. Of that 85% you marked down, 10% of it you said you went to Price Chopper, but you actually went to Home Depot. Now make it a $30 million checkbook and have that happen. So you can see, OK, at the beginning of the year, I had this much, my bank statement says it. And the end of the year, I had this much, the bank statement says it. But I can’t tell you everything I spent money on. Maybe I got $100 in from my grandmother, that I thought I got from work. So yes you can say, I know what I started with, I know what I ended with, that’s what I have. But how did I get from point A to point B? I can’t tell you everything that got me there.”

Dinolfo confirmed that the lack of proper backup documentation from 2012-2013 is why he was unable to a complete an audit of the city’s finances. While showing me a list of entries from one example account, he said, “you should be able to take that list and say here’s what the accounting record says that is owed, and there should be some other type of documents or agreements to support the dollar amounts.”

Overall, Agresta’s plan is to concentrate on making sure that the financial records kept during his time in office are accurate and able to be audited, rather than going back to fix every detail from the past years.

I asked Dinolfo if he thought his strategy was wise.

“Absolutely,” said Dinolfo, “The only thing you can do with the past is learn from it. So you want to go forward.”

Where do we go from here?

If the city had unlimited resources, I would definitely be in favor of hiring an army of accountants to scour the past years’ records and locate every receipt and invoice for every single transaction. The problem is, no one knows how much that would cost, or how long it would take. And even if it was feasible, it’s unclear whether that would put us in any better position than we are today.

However, my concern is that even if we have accurate totals as to how much money came in an out in past years, if we know there are still uncorrected errors, how do we know for sure that our various fund balances are correct? For instance, if a significant transaction was booked to one fund rather than another, one balance might be too high and the other too low. Fund balance information is important to both the mayor and common council in order to make sound budgetary decisions.

Perhaps, the best course would be to spend a limited amount of money to hire a third party accounting firm to look at the situation with the previous year’s inaccuracies and give us some options along with a cost versus benefit analysis. We’ve hired outside accounting consultants for specific tasks in the past. But we have not yet asked a consultant to give us a qualified opinion as to what strategies are available and what they might cost. I can’t imagine our situation is unique. Maybe there are best practices that could be learned from other municipalities that have faced this problem as well. The fact that Dinolfo told me he endorsed Agresta’s strategy of looking ahead rather than back is significant. However, maybe a formal report, either backing up Agresta’s direction, or perhaps suggesting a choice of alternatives and the associated costs, might help our elected officials move ahead with greater confidence.

About Tim Becker

Tim Becker is the owner of AnthemWebsites.com LLC which publishes The Compass. He serves as both editor and a writer.

3 Responses to Three things you need to know about the city’s last financial audit

  1. Thom Georgia says:

    Tim, as always you show true integrity to journalism in laying out the facts and dispelling the oft-present histrionics around city finances. The current Controller has done a superior job. I’ve only known Matt Agresta in a tangential working relationship (my tenure in the mayor’s office having immediately followed his), but I have no doubt as to his expert ability as evidenced by the exceptional professionalism he’s brought to that office.

    I think it important though, to offer a soft rebuttal to an element of your conclusion, be it with all respect intended:

    —“However, my concern is that even if we have accurate totals as to how much money came in an out in past years, if we know there are still uncorrected errors, how do we know for sure that our various fund balances are correct? For instance, if a significant transaction was booked to one fund rather than another, one balance might be too high and the other too low.” —

    That idea perpetuates two very huge misconceptions about municipal finance. First, that fund balance is only the difference between revenues and expenditures for a given year, and second, that it is the same as an available cash balance. These are simply untrue and a common misunderstanding of political economy by the amateur budget analysts who so often have much to say.

    **As for the first point, fund balance is cumulative, of course, so knowing the actuals vs. budgeted is necessary, but knowing whether those funds are restricted or unrestricted in nature (based on their original allocation) is the more important indicator.

    **As for the second (and in my opinion the most important misconception), fund balance figures are not solely restricted to liquid cash values. This “figure” also represents encumbrances, possibly even pre-paid expenses, loans-receivable and, I would hope, fixed-asset inventories. Meaning, of course, it’s not a savings account for rainy days.

    To reduce the complex machine of municipal finance to understanding your checkbook is a false equivalency. It’s more than looking at your balance in the check register and reconciling that with the statement from your bank. You would have to, in determining the totality of financial health, also account for your 401K, house value, that car in the garage, your school loans, your expected end-of-year bonus, and your credit card debt.

    It’s for that reason it is inherently unhelpful to keep screaming “look at the numbers” (as a certain Controller candidate loves to espouse – not Agresta, btw). That’s like yelling at a baby struggling to walk for the first time to “just use your legs!”. It is without understanding of the complicated neural processes involved or the unseen skeletal strength needed. Same for the city “checkbook”…there’s a lot of supporting levels, some fixed, most moving, that allow the city to run!

    It is my hope that politicians in this city, if they neither have the wherewithal to learn the complexities or posses the ability to do so, simply stop the doom & gloom charade. It seems to be the only financial strategy some of them have; mask their ignorance by agitating their base into confusion.

    • Tim Becker says:

      Thanks. I appreciate the points you’ve made here. I do understand that the the examples I’ve given in this article are simplified, but I think are necessary in order to convey the essence of the problem in an understandable manner to someone (such as myself) who doesn’t have a degree in accounting and may not have the opportunity to question the controller and auditor as I have been able to.

      The way I see it, is that if (hypothetically) there are significant transactions that are booked to the wrong budget line, that’s going to throw off our accounting in some way, whether it be fund balance, or any of the individual lines in the budget, and could result in a bad financial decision down the road. Exactly how or where that manifests itself, we have no idea, because we haven’t gone through each an every transaction.

      I think the checkbook is still a good *analogy* because it illustrates the essence of the problem with the city’s financials – we know we aren’t missing any money, but we can’t have the highest confidence that an audit would give us as to the accuracy of the various individual accounts.

  2. diane hatzenbuhler says:

    Tim and Thom, I would agree with both of your assessments in trying to analyze the information and make it more understanding for the public. The same was true of the Recorder earlier today.

    One thing that has not been done is an asset inventory, as Matt has not been able to do it yet. In addition, we need to be sure that we have sufficient revenue to support our expenses. Our sales tax has fallen off and we have bond debt to be paid. Before going out for any additional bonding, I feel it would be important to have the finalized documents in hand for the CPA telling us we have the ability to support our debt. It has been the biggest concern for the longest time because when the state says you are in financial distress, one of the factors is bonding. When communities continually bond it is an indication that we have no cash reserves, and right now Matt is saying the fund balance has gone up, but gone up from what. Matt has worked tirelessly trying to get things done, I am only sorry we will not have it before the elections.