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Documents show ‘material weaknesses’ in city’s financial reporting


State Treasurer, outside accountant cited same discrepancies; City: ‘We fixed it’

By Roger McCredie-Documents obtained by the Tribune show that at least twice within the past four years, the state treasurer’s office cited “material weakness” in the way the city reported its financial activity. On one such occasion the treasurer’s office also reprimanded the city for filing its financial statements three months after deadline, saying, in effect, “Don’t let it happen again.”

Records show the city’s own CPA firm, in two consecutive year-end audit reports – 2010 and 2011 – likewise identified “material weakness” in submitted reports and warned the city to take corrective action.

On January 25, 2011, Sharon Edmundson, Director of the state treasurer’s Fiscal Management Section, wrote to Mayor Terry Bellamy that “corrective action regarding the issues discussed [in the letter] may improve [the city’s] financial condition.”

Edmundson began by stating that Asheville’s financial statements “were not received in our office until January 4, 2011, well after the due date of October 31, 2010. A report received by the Board [i.e. city council] six months after [the June 30 fiscal] year-end identifies financial and operational problems after it is too late for the Board to take effective action.

“As stewards of the public’s resources,” the letter continued, “the governing body is responsible for assuring that audited financial statements are available to the public in a timely manner … we urge [council] to determine the cause of the delay, and take appropriate action to ensure that the audited financial statements for the current year are completed and submitted by October 31, 2011.

“We noticed various weaknesses concerning your City’s internal control system that were communicated to you by the auditor,” Edmundson wrote. “We are especially concerned that the auditor reported as a material weakness that bank reconciliations were not performed timely …”

A few weeks earlier, on December 28, 2010, Dixon Hughes PLLC, the city’s outside CPA firm, after having audited the city’s books, submitted reports to the city summarizing its findings on internal financial control and on federal and state compliance. The financial control report identified as a material weakness the fact that “The City was unable to reconcile its main operating bank account on a timely basis,” adding that this could allow “material misstatements, caused by error or fraud, [to] go undetected and not corrected in a reasonable time period.” This condition, the report said, was likely caused by “problems in the City’s processes for recording cash receipts [which} were complicated by staff turnover, the conversion of the City’s accounting system and multiple, decentralized cash receipting and depositing locations.”

Also cited in the CPA’s internal control section was confusion stemming from the city’s manner of reporting long-term assets, such as governmental funds, and the revenue generated by them. This problem, the report said, was caused by “insufficient understanding, supervision and review of the activity recorded in the fund [s].”

The documents show that Lauren Bradley, the city’s then Director of Finance and Management, replied to the auditors that Asheville’s treasury services had instituted “new control and reconciliation processes in October and November 2010” and said other corrective measures, including on-site training, would begin in March of 2011.

In a reply to the state treasurer’s letter the following month, Mayor Terry Bellamy echoed Bradley’s promises and cited employee turnover in the finance department, changes to the city’s accounting system methods and redeign of “the city’s entire financial account structure” as reasons why the city had not met the October 31 deadline for filing its state report.

But the following year, the cycle began again.

Records indicate the city did indeed file its report for the 2011 fiscal year on time. But once again Dixon Hughes, in its yearly audit wrap-up, called attention to a material weakness in the city’s financial reporting. Dixon-Hughes acknowledged that the city had, albeit belatedly, corrected the defects called to its attention the previous year – it referred to this correction as a “prior period adjustment” – but reported the city had overstated its “Governmental activities” assets by nearly $5.2 million and its assets from “business-type” assets by more than $2 million.

The city’s response, apparently also authored by Bradley, stated that “Capital asset identification reviews now occur periodically throughout the fiscal year.” Bradley also said the city had determined it had been erroneously calculating its contributions to its employee benefits plan, but had since corrected that methodology as well.

The 2012 CPA audit gave the city’s reporting methods a clean bill of health and stated, “In our opinion the City complied, in all material respects, with the compliance requirements … for the year ended June 30, 2012.” Documents for 2013 are not yet available. On the face of it, the city’s slippage in reporting its finances for 2010 and 2011 would appear to be a closed book. A source close to city government, who spoke on condition of anonymity, said the auditing and reporting process, which is a matter of public record, is something that bears scrutinizing every year. “We’re talking about errors that happened over two years ago, yes,” the source said, “but the way the errors happened and the areas in which they happened are disturbing. This is the sort of thing that needs staying ahead of the curve and constant attention. Plus, the city has had further turnover in the financial department.”

In January of 2013 Lauren Bradley’s title was changed to Executive Director of Finance and Strategic Planning. In June, she unexpectedly resigned that position, with its salary of $101,745, and accepted a position as Chief Financial Officer of the same law firm that employs Vice Mayor Esther Manheimer, who currently serves as chairman of city council’s finance committee. Manheimer, now a candidate for mayor, declined to comment last week on the 2010 and 2011 discrepancies.

Next week: What documents reveal about the city’s overall financial health.

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