Chester Public Utility District audit reveals internal control breakdown
An audit of the Chester Public Utility District for the 2011-12 fiscal year confirmed recent grand jury findings that the district was badly mismanaged during that time.
Certified public accountant Clay Singleton reported finding unauthorized transactions, fiscal mismanagement and leadership breakdowns.
He highlighted those problems, and others, during a report to the CPUD board Aug. 13.
Singleton was reporting on the findings of the audit prepared by the accounting firm Haws, Theobald and Auman for the fiscal year ending June 30, 2012.
Singleton said William D. Turner was still acting as the CPUD general manager and fire chief during the time of the audit. Three new members of the board (Joe Waterman, Wes Scott and Barbara Montandon) had not yet been seated.
Singleton said the audit revealed a total of five material weaknesses — three of which were significant and likely bear responsibility for the critical financial and other issues the district is facing today.
He said the three major weaknesses were “unauthorized transactions,” “fiscal mismanagement” and “leadership breakdown.”
“In the testing we did we were alerted to an inappropriate credit card balance ($1,700) that was not reimbursed to the district,” Singleton said. “As a result, we went back to 2009 and looked at credit card transactions from that time forward.”
Neither Singleton nor the published audit noted any further credit card discrepancies. However, the single $1,700 credit card charge is only $20 less than the amount cited by Plumas County District Attorney David Hollister when he, after a lengthy investigation, charged Turner with felony embezzlement.
Turner is accused of spending $1,720 at the French Quarter Men’s Club in Reno and then personally authorizing the district to pay the charge. He is scheduled to reappear in Plumas County Superior Court on Aug. 23. Attorney Robert Zernich is representing Turner.
“We recommend that the board look at credit card and bank statements each month,” Singleton said.
The second item listed in this area was $50,000 in crew pay that was not authorized by the appropriate personnel. The audit did not give specifics as to whether one or several employees received this unauthorized pay.
“The district needs to establish policy to control credit cards and authority establishing spending limits without board approval,” Singleton said.
Singleton said it became apparent that there was a lack of oversight by the board at that time.
Specifically, the audit stated that there had been inadequate control over the documentation of the formal actions of the board. Singleton said that it appeared that board minutes had been modified from those originally approved by the board.
“We recommend that the board strive to obtain best practices training for the oversight of a utility district,” Singleton said.
He described the process as the auditor looking for reasonable assurance as to whether or not the financial statements are materially correct.
“The financial statements are materially correct based on our testing,” he said.
“And in the process we get to know the district and its internal controls. We have made a number of recommendations over the years,” he said.
The accounting firm is not the first outside agency to clearly state the failure of the board to supervise the then general manager.
Issues with internal controls and lack of supervision of the CPUD resulted in a very lengthy report of issues and recommendations by the Plumas County Grand Jury.
“In our testing of the district, we noted several situations where the financial affairs of the district were not properly handled,” Singleton said.
He listed the following five reported in the audit:
The district, for an extended period of time, did not bill properly and completely for its ambulance service.
The district allowed very large payables for workers’ compensation insurance ($92,046) and for PERS retirement ($138,000) to accrue during the year.
The district fell behind in its billing of fire contracts during the year, thereby potentially losing funding.
The district did not adequately safeguard medical supplies (greater than $12,000) and equipment that were donated in the year. The audit revealed these items have “substantially gone missing.”
The fire division fund has not made payments on its ambulance purchase loan to the sanitation division fund.
Haws, Theobald and Auman issued an extended list of recommendations to correct the issues.
The audit and Singleton’s recommendations to the district are:
That the district conduct regular training with its ambulance personnel to ensure that the run reports are filled out accurately and completely to all for proper ambulance billing and that the district regularly consult with ambulance billing code experts to ensure the billing is being done properly.
That the district establish a regular financial review process to ensure that its bills are paid in a timely manner.
That the district ensure it has adequate personnel and holds personnel accountable for the fire contract billing.
That the district establish an inventory control process to ensure that medical supplies and equipment are safeguarded.
That the district should establish a budget for the fire division fund so that the loan to the sewer division fund can be paid up to current.
“One of the keys is to have regular training with personnel as to how ambulance billing codes work and possibly have an employee trained to do the billing. You need to ensure run reports are filled out well and delineated correctly so the biller can charge appropriately,” Singleton said.
He also noted an interesting aside to the audit in the form of revenue categories identified by his firm.
“Because the district made a lot of money on the fire side of the house, we have changed the status to that of an enterprise account. Previously the fire fund had been designated as government fund, as most are not designed to earn revenue,” Singleton said.
He also complimented the board on the establishment of the 500 Account, saying, “It was a good move to identify revenue from the fire contracts with the Lassen National Forest.”
Auditor comments on the two remaining material weaknesses in the areas of “lack of segregation of duties” and “financial reporting” are as follows.
Lack of segregation of duties
“The first finding is common to 90 percent of the audits we do. In small organizations only so many people are available to perform checks and balances to avoid fraud,” he said.
He described a proper check-and-balance system as having enough employees to distribute various cash and financial reporting actions. Ideally, the employee who receives the cash would not be the same employee who prepares the bank deposit or the resulting financial statements.
“Fraud is two things: misappropriation of cash and misstating your financial statements,” he added.
The audit recommends that the district employees and board maintain diligent awareness of the potential risks of not having adequate segregation of duties.
“During fiscal year 2011-12 it is noted there are several instances where financial matters were not handled correctly,” Singleton said.
He said that the CPUD, “similar to other California special districts, does not have policies and procedures in place to ensure complete and accurate financial statements, footnote disclosures and management’s discussion and analysis prepared in accordance with government accounting standards.”
Singleton’s recommendation was that CPUD consider the cost benefit of hiring an accountant familiar with those standards or hiring an independent CPA firm to compile the financial statements.
He then talked about the various components of the audit report and said, “The documents beginning on Page 5 represent the balance of all funds. This is one of the most useful financial statements and it’s no surprise the fire fund is struggling as of 2012.”
Singleton brought the board’s attention to what he called “a few more important schedules” for the board statement of operations, particularly in the area of projected budget versus actual.
“This is a good document for the board to follow throughout the year. You should say, as we look at this, ‘How should we plan to go forward?’” Singleton advised.
In all instances in which material weaknesses were stated in the published audit, CPUD interim Fire Chief Ben Thompson provided responses in the form of a corrective action plan.
His and the board’s responses to the five listed material weaknesses were also published in the audit.