Killeen residents and a few City Council members are calling for a forensic audit, or an investigation into the city’s finances.
June was the first time many council members said they received a true picture of the city’s finances. That was when interim City Manager Ann Farris, who oversaw the city’s finance department the past three years, first told the council expenses exceeded revenues, and city savings are dwindling.
As council members attempt to balance the 2017 fiscal year budget, residents say they want to know what’s happened to their tax dollars over recent years.
During public hearings on both the city’s tax rate and budget during the past two weeks, several taxpayers demanded a forensic audit, or investigation into “where the money went.”
A few council members are asking for the same thing, but other council members are asking to work with city staffers to narrow the scope of the investigation.
Residents, however, have expressed concern about the potential bias inherent in having the very city staffers who didn’t sound an alarm about financial decline — and council members who didn’t question administrators about their spending — be put in charge of the audit committee.
During the city’s first 2017 fiscal year budget hearing Tuesday, residents echoed the sentiments.
Araceli Cook questioned how the city’s audit committee — Mayor Jose Segarra and Councilmen Juan Rivera and Jonathan Okray — could choose an outside forensic auditor.
“To me, that’s a conflict of interest,” Cook said.
All three were on the council as the city overspent, as depicted in Farris’ presentation June 30.
“We definitely need an internal audit done, but (from) a nonbiased firm,” Nance Travis said about the investigators. “We should have this done on a regular basis.”
Resident Sandra Cook said she supports the audit, and Chalitta Moore suggested creating regulatory and enforcement committees for “checks and balances,” or oversight of taxpayer money.
“I would like to know exactly what caused the deficit,” Moore said. “How many years did it take to get there?”
It’s a matter Councilman Richard “Dick” Young and Councilwoman Shirley Fleming said a forensic audit would address, as both requested the matter be discussed at the council’s Aug. 9 workshop meeting.
“It’s not that I don’t trust anybody,” Fleming said at that meeting. “But we’re trying to get a new city manager to take over and come into the city with these problems, and we want to have a forensic audit to know about the money — where it’s going, how it’s been spent.”
Young said the forensic audit is residents’ demand for “sound fiduciary oversight.”
“This (audit) must be quickly addressed, and the process started so that we can also move the city forward,” he said.
Forensic VERSUS financial audit
Robert Belt, a certified public accountant with the Houston-based Belt Harris Pechacek firm, has “performed many forensic audits,” or “agreed upon procedures.”
“In that type of engagement, you identify the allegation and then agree on the procedures that will hopefully confirm or deny the allegation,” Belt said.
The forensic audit could “potentially uncover a number of issues not revealed by a financial statement audit, which is very broad and general,” he said.
In March, the council received the city’s annual financial audit from Adam McCane, a representative from Weaver LLP, the city’s external auditor.
Then-Mayor Scott Cosper asked McCane if he thought the city was in “excellent shape, operationally,” but McCane said issuing an opinion was not part of the audit’s scope.
“Giving an opinion on the financial health of the city isn’t exactly something we’re equipped to do,” McCane said.
The auditors review the city’s financial statements to determine if they are “materially correct” and in compliance with regulations and policies, McCane said.
McCane said the audit did not find any irregularities, illegal acts or any findings of material weaknesses in financial reporting.
However, McCane said, the audit does not give an opinion of the city’s financial health but rather should be used by council members as a tool.
Cities’ financial audits were the subject of a Los Angeles Times story after the investigation of Bell, Calif., showed corruption and fraud, despite routine audits.
The Times reviewed state and local records in California and found that “the independent audits that public agencies in California are legally required to obtain frequently fail to flag cases of fraud and mismanagement.” One factor, the Times said, was that cities might not rehire auditors who don’t give them a good review.
The difference between the routine financial statement audit, which is required yearly and performed in-house by the city itself, and a forensic audit, is that the latter typically is used to uncover suspected abuse, fraud or misappropriation. The former requires only that financial statements be materially accurate, specialists say.
“This (forensic) audit must be conducted by a total outside non-local forensic audit team to ensure autonomy of results,” Young said in a letter to Farris. “I don’t believe the City Council, staff or management has the expertise required to audit itself fairly.”
Belt said the forensic auditors are unbiased and “will generally be above manipulation throughout the engagement.”
“However, the agreed upon procedures must be adopted by someone with the organization,” Belt said. “Normally, those individuals want the community to get past the allegation and don’t want to further muddy the water by interfering. The city could always appoint an audit committee and have members with dissenting points of view on the committee.”
Nicole Bradshaw is an auditing manager at Waco-based Pattillo, Brown & Hill, and has worked nearly a decade providing audit and advisory services to local governments.
Forensic auditors are certified public accountants with a specialized certification in forensic accounting. The specialty allows an auditor to investigate and trace money trails.
Bradshaw, who helps to oversee the company’s government audit division in Waco, is bound by several state, federal and national auditing standards, and has experience with municipalities, according to the firm’s website.
Setting the appropriate scope of a forensic audit is important.
“We can’t audit every single thing that a city has — it would be way too big,” she said. “(And) we can’t broaden that scope.”
Belt said a forensic audit, or “agreed upon procedure engagement,” can be as broad or as specific as someone makes it.
“The trick is to narrow the scope to address the specific allegation to get the maximum bang for the buck,” Belt said.
During the council’s Aug. 9 workshop meeting, Farris estimated the forensic audit cost at $235 per hour for a single examiner, and a team could cost $395 per hour.
Bradshaw said the scope of a forensic audit can be narrowed to include the movement of money between funds in a city, and an analysis can be performed to show its path. It can be requested specifically.
“If you had auditors that understood government accounting, this would not be an issue,” Bradshaw said.
Keeping a pulse on where the money is going is done even during a financial statement audit, she said, but with less detail.
Bradshaw said forensic auditors can mention irregularities outside the scope of the audit. For example, if an examiner is brought in to look at utility billing and something else is discovered, he or she is allowed to mention it, Bradshaw said. If a record is delayed or not produced, it would be flagged and noted.
During, the council’s Aug. 16 workshop meeting, Fleming said she started to research several firms that are capable of conducting municipal forensic audits.
“I want to make sure we do this,” Fleming said.
During the council’s workshop meeting this week, Okray presented an update from the committee.
“I asked that the following departments be a focus of the audit — finance, public works and human resources,” Okray said. “I also ask that our enterprise funds be considered in the scope of the audit.”
In Young’s initial request for a forensic audit, made in August, he suggested looking at several areas including: any and all major loans, expenditures or transfers into and out of the enterprise and special funds — including the fleet replacement fund — budget amendments, bonds, their use and transfer, or the interest income, driven by special projects, such as U.S. Highway 190 and Trimmier Road, an analysis of the Cornerstone building, 101 E. Avenue D, and any general fund reductions, temporary or permanent.
Young said the forensic audit should target the past four to seven years, based on Farris’ June presentation of the decline in the city’s finances.
City documents show general fund expenses, which account for 40 percent of the city budget, consistently began to outpace revenues in 2013.
The sample request for proposal Okray read calls for reviewing independent audit reports and communications for fiscal years 2012, 2013 and 2014.
Okray said after the council determined the scope of the audit, following the adoption of the 2017 fiscal year budget, the city auditor and city attorney would draft the request for proposal and submit it to the audit committee for approval in October.
Wallace said she targeted the audit committee meeting Oct. 7.
However, Wallace, who’s been with the city since 2008, submitted her letter of resignation to Segarra on Thursday, and her last day is Sept. 30.
Segarra said he doesn’t think Wallace’s departure will change council and resident requests for a forensic audit, or investigation, of city finances.
Okray said the city auditor estimated a forensic audit firm to be selected in December and could start working as early as January.