Henderson’s auditor didn’t have to explain any budget overruns or $400,000 mistakes when he appeared before City Council members Thursday night because, according to the state’s Local Government Commission, no such problems exist.
That was one of the unexpected answers from auditor Curtis Averette of the Henderson accounting firm William L. Stark & Co. during a 45-minute discussion with the City Council’s Finance and Intergovernmental Relations Committee.
Council member Elissa Yount, whose questions Averette came to answer, praised the auditor for his presentation, in which he offered answers for all 18 of her written questions.
“Mr. Averette has answered everything definitively and honestly and openly, and that’s all I could ask of him,” Yount said. “Mr. Averette has been very forthright and honest and complete in what happened.”
Averette made his long-awaited appearance almost four months after he submitted the audit to the city Jan. 28 and three months after the council held a public forum on the audit Feb. 28.
Without elaborating, Averette said Thursday that the audit for the fiscal year that ended June 30, 2004, was the most challenging he and his staff have prepared for Henderson. His firm has prepared the city’s audit for seven consecutive years and will do so again for the current fiscal year.
That audit found that the bottom had fallen out of the city’s general fund balance, which in one year declined from more than 10 percent of annual spending — less than half the Local Government Commission’s ideal of 25 percent — to under 3.5 percent — less than half of the LGC’s recommended minimum of 8 percent. That finding brought a critical letter from the LGC in February and complaints from Yount and Mayor Clem Seifert that they should have been warned of the fund balance problem long before the audit arrived.
City Manager Eric Williams forwarded Yount’s list of 18 questions to Averette on May 6. The list was essentially the same as the questions Yount planned to ask Averette when he attended a FAIR meeting Feb. 17, but the chairman of that committee, Bernard Alston, postponed the audit discussion that night in favor of the public forum. Averette’s decision not to attend that forum contributed to three months of miscommunication, frustration and suspicion as Yount repeatedly requested the auditor’s appearance.
“To say there has been miscommunication between the many parties involved would be a gross understatement,” Averette said. “I’m hoping my appearance tonight on 48 hours’ notice will put to rest any notion of reluctance on my firm’s part to appear before you.”
He said the miscommunication included his conversation with Seifert last week. Averette said the mayor, in discussing that conversation at Monday night’s council meeting, made several statements that the accounting firm believes were incorrect.
Among other statements, the mayor said Averette told him he could answer one of Yount’s questions, and the state’s Local Government Commission would have to answer the rest. As things turned out, the auditor provided answers to all of the questions, with the help of the LGC.
Averette broke the questions into two categories, Embassy Square and responsibility. He further split Embassy Square into the overexpenditure of the Embassy development and the general fund-capital project deficit.
Yount’s questions and Averette’s answers:
2. Since there was such a material change in the fund balance, how did we get an unqualified audit?
3. When the conference call was made to the LGC on Oct. 13, who was present and privy to the call? What amount of deficit was discussed? What proposal was made to correct the problem?
4. Please explain where in this audit we can find the figures that show the deficit created in the General Capital Project Fund and where this deficit was eliminated. Can you point out where the transfer from fund balance to CIP is and when it took place?
5. Our budget ordinance called for borrowing $900,000. Did the LGC approve or disapprove this borrowing?
9. Your audit report tells us that all disclosures necessary to enable the reader to gain the maximum understanding of the city’s financial affairs have been included. It appears to be a strange choice to put such a significant fact — the loss of all this revenue in the fund balance — on the next to last page and not even name the funds that required doing this. Please give your rationale for this.
10. As a corrective action to say only that the finance officer will be more careful in the future to ensure proper funding for all expenditures seems a little lame when we’re talking about $1.8 million. Please give your rationale for this.
12. Have our preaudit obligations failed us?
13. Who authorized the interfund transfer that eliminated the deficit in the CIP for Embassy?
14. What does the Council need to do to see that interfund transfers are not made unless they have Council approval?
18. In the Operating Budget Policy for the City of Henderson it states that any appropriation of fund balance or the use of retained earnings shall show the current fund balance or retained earnings and how such use would affect fund balances. When and how should this be shown?
Averette provided a detailed timeline to answer the above group of Embassy-related questions:
* April 12, 2004 — Averette presented the audit for the fiscal year that ended June 30, 2003. That document included a finding of a deficit of $1,200,637 in the general capital project fund. That was money spent on the Embassy Square development site, but there wasn’t a revenue source. Other capital projects helped balance that overall capital fund.
* April 12, 2004 — Yount called Averette with questions regarding that finding, and he advised that the council needed to formulate plans for the Embassy foundation to reimburse the city.
* June 14, 2004 — Averette began preliminary fieldwork for the 2003-04 audit and learned about the transfer of the land to the Embassy foundation. Finance Director Traig Neal arranged a meeting with Williams and Assistant City Manager Mark Warren. They discussed that the city never took out a loan on the land, and now it was too late.
* June 29, 2004 — An LGC staffer advised the city that a promissory note from the Embassy foundation, combined with a notation in city financial statements, would satisfy the state agency. Neal and Warren told Averette a meeting with the appropriate officials would be held.
That hoped-for promissory note would have counted as revenue and prevented the fund balance from taking a hit.
Averette said he thought the council was informed of what was going on with the capital project deficit, but he said that was not his responsibility in the chain of command. The auditor reports to the finance director and the FAIR chairman, “and that’s where my obligation ceases.”
* Sept. 20, 2004 — Averette asked about that meeting, and Neal said preliminary discussions had been held.
* Sept. 30, 2004 — Williams, Warren, Neal, Sam Watkins, Kathy Powell, Alston and City Attorney John Zollicoffer met, and Watkins said the foundation would not be able to give the city a promissory note.
* Oct. 13, 2004 — A conference call was held among Williams, Warren, Neal, Watkins, Zollicoffer, Alston, Holloman and Holloman’s deputy. The LGC officials advised that the city had to create a “due-to/due-from” statement between the general fund and the capital projects fund. Showing that deficit on the books was “misleading,” so the city had to create an internal loan statement showing that the capital projects budget had borrowed $1.2 million from the general fund.
“This reduced the general fund balance below the 8 percent threshold mandated by the Local Government Commission,” Averette said.
Averette said council approval was not necessary for the due-to/due-from statement because “the damage had already been done,” and the LGC mandated that financial journal entry.
* Nov. 17, 2004 — The William L. Stark team completed the audit fieldwork and began the two-month process of compiling the audit.
* January 2005 — The city received the audit from Averette.
“You see my quandary, not knowing that the fund balance had been depleted like it was until January,” Yount said. She said that having such knowledge might have changed spending decisions in the past year, and her purpose in asking the questions was to prevent similar problems in the future, not to lay blame.
1. You say in the audit that your internal control would not necessarily disclose all matters in the internal control that might be material weaknesses and that your audit does not provide a legal determination on the City of Henderson’s compliance with the requirements of Government auditing standards. Who should be pointing out to the Council members material weaknesses and who oversees the city’s legal compliance with requirements?
The city’s management is responsible: the City Council, the city manager, the assistant city manager and the finance officer.
6. When were you aware that the city did not have a budget ordinance to cover $395,704?
In a letter dated Thursday to Averette, T. Vance Holloman addressed this question, the auditor said. He read the letter, which explained that the city has one budget ordinance for all of its capital projects. The LGC looked at the bottom line for that ordinance and found that “expenditures did not exceed appropriations for the fund as a whole.” In addition, the expenditures for all elements of Embassy Square — the police station, the cultural center, the street work — did not exceed the total budget for that development project, so the LGC was satisfied.
Yount followed up: “So you’re saying … We haven’t overspent by $395,704?”
“Not according to the LGC,” Averette said.
“You have one budget ordinance for all of your projects, and based on that fact, you did not overextend your budget,” he said.
“That is something that will never make sense to me,” Yount said. “That just sounds like voodoo, voodoo accounting.”
7. We received a letter for the LGC in 2003 as well as 2004 about our budget problems. Whose responsibility is it to see that we abide by and carry out their instructions?
According to the LGC, it’s the City Council.
8. When was the letter of November 17 written? When did you assume the Council members received it? Who actually wrote the letter? Were any of the concerns in this letter discussed at any time with city management in the months prior to the letter being sent? If so please give complete details of all discussions.
The letter, along with all other audit materials, was dated Nov. 17, 2004, as a standard auditing procedure to show that the fieldwork was done that day and to clear the auditor of responsibility for anything that happened after that day. The city manager received the letter and the audit at the same time, Jan. 28.
Averette refused to be pinned down on the date the letter actually was written.
11. How long should original invoices be kept for any capital project?
Averette provided a detailed set of recommendations from the LGC.
15. What does the Council need to do to see that we do not expend any moneys, regardless of their source, except in accordance with a budget ordinance or project ordinance?
The LGC recommends that the council receive interim financial statements showing budget compliance.
16. According to the Local Government Budget and Fiscal Control Act, a project ordinance shall clearly identify the project and authorize its undertaking, identify the revenues that will finance the project, and make the appropriations necessary to complete the project. Who is responsible for seeing that this is done?
The finance officer is responsible.
17. According to the same Act, no obligation may be incurred for a capital project or a grant project authorized by a project ordinance unless that project ordinance includes an appropriation authorizing the obligation and an unencumbered balance remains in the appropriation sufficient to pay the sums obligated by the transaction. Who is responsible for seeing that this is done?
Again, the finance officer is responsible.
“Has the public been misinformed concerning the budget and the questions Mrs. Yount asked?” Mary Emma Evans said. “Did we mess up, or did we not?”
Based on the LGC’s letter, the city did nothing wrong, Averette said.
He said that in a perfect world, each line item in a budget should not exceed the amount appropriated, but that’s not possible.
Yount, however, said she thought the finance officer should monitor the line items and take action if some expenditures are going over, not wait until the total budget goes over the amount appropriated.
She said that system seems to make line items meaningless.
“I did not say that line items are meaningless,” Averette said. “They are not meaningless.”
Yount asked whether the auditor had advice on getting cash statements for better monitoring. Averette said that’s not an immediate issue because the city is under the LGC’s scrutiny, and the LGC requires interim statements from the finance officer.
“I wish this meeting tonight had been held a month ago,” Ranger Wilkerson said. He said quicker action would have avoided a lot of bad publicity. “If anybody needs anything answered, let’s get it done.”
Evans’ primary concern was in putting to rest public questions about the Embassy project and city finances.
“Quite frankly, Miss Yount’s going to ask questions from now until the end of time,” Alston said.
He added: “We cannot give an answer that everybody is going to accept.”
Evans wondered whether the answers would settle any of the questions.
“I’m still hearing the same questions, but it seems like I’m not getting a concrete answer,” she said. “Have we cleared up any of the things that we’re discussing?”
“I know how it happened, and I know what happened,” Yount said at the end. “I don’t really know why it happened, and I’m not really satisfied that it happened in the proper way.”