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Flint, MI– An audit of the city of Flint’s finances found several issues, some repeated from the previous year, related to a lack of checks and balances, missing documentation, and incorrect payments and charges.
Doug Deeter, an auditor for Rehmann, presented the audit findings at a Special City Council Finance Committee Meeting on Feb. 1.
He provided a general overview of the City’s finances as of June 30, 2020, as well as issues he found while conducting the audit and recommendations.
The audit found seven material weaknesses in Internal Control over Financial Reporting, six of which were labeled as a “repeat” issue, meaning a similar problem was found in the previous year’s audit.
The first finding was that the city’s accounting records were initially misstated by amounts material to the financial statements. Some of the inaccuracies were discovered by the city, and others by the auditing agency, Deeter said.
Many of the issues that were discussed had to do with a lack of checks and balances. Deeter said it was a “common theme.”
“There are internal controls and there’s policies in place at the city, but…we’re not convinced that it is being communicated to all of staff and staff are aware of all these policies and procedures that are in place,” Deeter said.
Deeter said there were instances where certain purchase card transactions that were approved by subordinates, not the purchasing manager, and in one instance, the person who submitted the expense report was also the person who approved it.
This was also an issue in utility billing, application of Water Residential Assistance Program (WRAP) credits, and payroll documentation.
Deeter said that right now, the billing supervisor can approve credits as well as the final billings before they are sent to the customer. He said this is considered “an inappropriate segregation of duties.”
The audit also found that there has not been an independent review of the way WRAP credits have been applied to customer accounts, to ensure they are posted correctly.
For payroll documentation, the audit found that “appropriate support was not maintained for certain pay rates and changes in pay rates,” and that there should be “an appropriate review and approval process,” for those changes.
Record keeping and supporting documentation was also an issue in other areas. Deeter said there were instances of an agency fund having certain balances “which the City was not able to provide support,” or “identify who the funds were owed to.”
For the water fund, the City was unable to provide documentation to support the balance, and certain accounts “are not being reconciled to the accounting system.”
There have also been instances of incorrect payments and charges.
Deeter said there were certain water and sewer charges that “did not agree with the approved rates.” The audit also found approximately $2.5 million in credit balances in the utility billing module that need to be applied to accounts or issued in a check to the property owner.
An issue new to this year that the audit found was that the City “erroneously paid certain municipalities more than what was collected,” and failed, in some instances, to submit taxes collected on behalf of other municipalities within ten business days.
Deeter said there was also an instance where the council approved a purchase order of a certain amount, and the amount the City actually paid exceeded that.
While Deeter said there were several issues the City has corrected for this year, including issues with purchasing, cash receipts, capital assets, and segregation of incompatible duties, the current issues underscored the need for improved communication and training to staff of internal control policies.
He provided a list of recommendations to assist the City in dealing with current issues they’re facing. He suggested implementing various processes to improve organization and accuracy, as well as independent review processes to ensure the appropriate checks and balances are taking place.
He also suggested implementing a fraud hotline so employees or citizens can anonymously report fraud.
The fund balance, or what the city has to use going forward, is $17,595,289. Of that total, $1,632,567 has been assigned by the city to use towards expenditures in the next fiscal year. The unassigned balance, $15,925,289, is available for future spending in future years.
The City received $52,569,689 in revenues from property taxes, income taxes, state revenue, transfers in, and others. This was $3,187,634 less than what they budgeted to receive.
For expenditures, on the other hand, the City spent $1,044,827 more than they budgeted to spend, for a total of $59,411,792. Public Safety was the largest expenditure category, followed by general government, facilities maintenance, legislative, judicial, community development, and transfers out.
Deeter said changes in the public safety category, including an increase in wages and pensions, were what contributed to exceeding the budgeted amount for expenditures. The fact that the city received less revenue than budgeted for, Deeter said, was due to a decrease in state grants.
Deeter said a good measure of how strong a general fund is for government is the ratio of the fund balance to the expenditures. This year it was a 30% ratio, down from 41% last year. Deeter called this a “significant decrease,” but said it was still a “pretty healthy fund balance from the general fund perspective.”
The City’s assets total $24,374,000. The majority of that, $17,692, 965, is cash or cash equivalents.
The City has $4,588,925 in liabilities, which are items the City incurred before June 30, 2020 but still owed at that point in time.
There is $2,190,000 of unavailable revenue because some grants were not received within 60 days of year end. This money will be recognized as revenue in 2021, Deeter said.