Flint, MI– An audit of the city of Flint’s finances revealed multiple issues that have persisted since the last audit, including unsupported and misstated accounts, a lack of checks and balances, and a violation of state law.
Doug Deeter, an auditor for Rehmann Robson, presented the findings at a Special Flint City Council meeting Jan. 25.
While many council members said they were disappointed in some of the repeated issues, Deeter said he thought the finance department could resolve these problems.
“The finance department has had a lot of turnover. They’ve been really understaffed over the years. …But I’m hoping that now you have the staff in place, you have, you know, some more consistency with the positions that are there, that some of these things will be fixed and reconciled,” Deeter said. “And maybe they already are.”
The audit only reviewed the fiscal year ending June 30, 2021, and Deeter said he believed the administration was working to resolve some of the weaknesses found.
There were eight “material weaknesses” that the audit found, meaning “there was a misstatement that has been corrected in the audit through the audit process, or that the controls are such that it opens up opportunities for potential misstatement to occur in the future, through the transactional transactions that the city processes.”
- Material Audit Adjustments
According to the financial report, the audit “identified the need for substantial adjustments to the city’s accounting records, which impacted a variety of funds and financial statement areas that collectively had a material effect on the city’s financial statements.”
Internal controls failed to detect all of the adjustments that were necessary to “properly record year-end balances,” which meant the city’s accounting records were initially misstated in multiple areas.
The report shows that various accounts were understated or overstated by hundreds of thousands of dollars:
- Custodial fund accounts payable and related expenses were understated by approximately $118,000.
- Claims payable in the self-insurance fund were understated by $202,900.
- Revenue related to impound fees collected from impounded vehicles was understated revenue by $510,920.
- Revenue was initially overstated in governmental activities for $47,363,332.
This was a repeated finding, as it was an issue in the city’s last financial audit.
- Purchasing Cards
The audit selected five purchasing cards to review, and found instances where some transactions were missing the appropriate approval.
“The city has a policy in place to dictate how the p-card process should work, but there are just some transactions that didn’t follow that policy,” Deeter said. “And we also noted a couple of p-cards were unable to provide support for the issuance of the approval of the card.”
Approval comes from either the department head, the finance department, or both, the report states. But the audit found p-cards missing department head and p-card administrator signatures.
Additionally, for two out of five p-cards selected, “the city was unable to provide support for the p-card approval.” Deeter said this is representative of a lack of checks and balances, which was an issue last year as well.
- Unsupported Accounts
Deeter said that there were instances where there were “liabilities,” an amount owed to someone else, that the city could not explain.
“So there was a liability recorded, but (the city) couldn’t provide any documentation of who this is owed to, why it was owed to, and that type of thing,” Deeter said.
According to the audit report, the city has liabilities of $131,168 recorded in the custodial fund “that are unsupported and the city is unsure what these amounts represent and who the city is holding these funds for.” The general fund also has an unsupported balance of $47,751 related to customer overpayments.
The audit report cites this issue as the “result of a lack of management oversight.”
“I know this is one thing the city has definitely been looking into to identify this,” Deeter said. This was an issue in the last audit as well.
- Utility Billing
The audit found multiple problems with the city’s utility billing process, including credits not being applied to customer accounts, and billing that does not line up with the approved water and sewer rates.
“Within the utility billing system, there are approximately $2.3 million in credit balances, so money that’s owed from the city to residents,” Deeter said.
He said there are many reasons for this. One, is that there is an agreement with local manufacturers that those credits would be applied at a certain rate in the future. He said that accounts for about $783,000.
“The other ones are, you know, people moved out, they had credits on their bill. Can’t find them, can’t locate him to get their money back to them,” Deeter said. “There’s other ones that just need to be applied to the active accounts, that type of thing. So just some cleanup needs to be performed there to get these credits taken care of.”
According to the audit report, the credit balances were spread across roughly 8,200 accounts.
“Additionally, any credits to customer accounts do not have a formal approval process in place,” the report states. “The billing supervisor can approve credits and then also approve the final billings before they are sent to customers. This is an inappropriate segregation of incompatible duties.”
This is also an issue for Water Residential Assistance Program credits which are “applied to customer accounts without anyone independently reviewing the accounts that credits are applied to.”
Additionally, the service charges for water and sewer in the utility billing system do not match the approved rates, although Deeter said they were “very minor differences.”
“The whole point is, you’re not following what was approved. That’s what we’re trying to fix, not that it’s causing great harm to the residents,” Deeter said. “But it’s just you’re not you’re not following you approved.”
He said that, “it’s difficult to go through and make sure all those match and agree but it’s something that should be done, and should be done on a regular basis.”
- Investments
According to the report, the city has $924,141 in a Death Benefit “trust fund,” but no formal trust agreement exists, meaning the city is out of compliance with state law.
“So our recommendation for the last couple years has been, the city really should create a legal trust for these funds, move these funds into that trust, and have that trust set up its own investment policy that allows these types of investments,” Deeter said.
The report states that this is a repeat finding, but that “the city’s legal team is currently working on the irrevocable trust.”
- Payroll Documentation
The audit found that there were some discrepancies between employment information the city had recorded and what the Municipal Employees’ Retirement System had recorded.
“So the city is required to submit certain demographic information to MERS for the pension plan,” Deeter said. “And what gets transmitted to MERS, needs to match what is actually the city’s records.”
Deeter said the documentation with the city and with MERS was “not significantly different,” but still worth noting.
When somebody comes to the city and makes a marital change for example, Deeter said that information needs to be sent to MERS for the “actuarial valuation process,” which is the appraisal of a pension fund’s assets versus liabilities.
“If that information that goes to MERS isn’t 100% accurate, then the valuation isn’t 100% accurate,” Deeter said.
According to the report, the city was also unable to provide a complete listing of terminated employees, and “the auditors had to compile the information to make a complete listing.”
“This condition appears to be the result of city employees making changes and not retaining documentation or approval. … As a result of this condition, city employees may be being paid incorrectly and the pension and OPEB (Other Post-employment Benefits) census data used by the actuaries may be incorrect,” the report states.
- Tax Distributions
Deeter said that the audit found the city had issues distributing the taxes it collected on behalf of other entities.
“The city collects property taxes on behalf of other local entities, the county, schools, there’s gonna be some others, colleges, that type of thing,” he said. “The state does require that these contributions are remitted to those local municipalities within a certain timeframe.”
According to the report, there were $1,804,827 worth of taxes collected by the city on behalf of other local units that were not distributed in accordance with the timeline required by the state. The city had also overpaid some local units in the amount of $461,816, and Deeter said the city is working on getting the money back to correct that.
The report also found that there were multiple accounts with undistributed taxes that have not changed since the previous year.
“So they still haven’t paid those funds out to those local municipalities,” Deeter said. “So part of the process is the city’s going through identifying who that’s owed to, and I know the city has been putting some significant time into this to identify and correct this issue.”
- Capital Assets
This finding was a new one, Deeter said.
He said the city owns assets worth hundreds of millions of dollars and that, “There were some pretty significant delays and getting information and getting reconciled information for this area.”
Deeter said they started the audit in mid-October, and got multiple revisions in December of capital assets which were not correct. After working to correct them and making sure the numbers agreed with other city records, the company got finalized capital asset information on Dec. 19.
“So that was a very significant area this year, some significant difficulties, but again, it’s hundreds of millions of dollars. There’s lots going into that,” Deeter said.
Deeter said the city was working on correcting this issue going forward.
Councilwoman Eva Worthing said she was happy to hear that with more consistent staffing, the city’s finance department may be able to correct these findings, but still expressed her disappointment.
“The p-card thing especially was pretty disappointing, given that last year it was a problem,” Worthing said.
Councilwoman Tonya Burns said it seemed like many of these things were “simple fixes.”
“But we just can’t seem to get the simple fixes done,” she said.
Councilwoman Judy Priestley said she was “deeply concerned” and “astounded” by the findings.
The financial report can be viewed here.
Wow! Shocker, not! Don’t hold themselves accountable.