Building department audit finds shortfalls in oversight
HOT SULPHUR SPRINGS — A presentation of the results from a forensic audit following a misappropriation of funds from the Grand County Building Department identified a lack of appropriate internal controls as the primary factor in the frauds, investigators said.
The results were presented at the Tuesday, June 24, Grand County Board of County Commissioners meeting and cited the failure of oversight from the former building department head, Scott Penson, and a lack of checks and balances between county entities as factors that allowed missing funds to go unnoticed.
“The building department manager, based on my review, failed to adequately supervise the employee,” said John Paul Anderson, a senior director with Alvarez & Marsal, the firm the county hired to complete the audit.
Former building department employee Brigid Irish has been charged with over 900 counts of embezzlement, as well as other charges, in relation to the case.
During their audit, Anderson’s firm found that some checks from the building department to the county treasurer’s office weren’t deposited in late 2011 or 2012, and that no checks were deposited from Jan. 17, 2013, to October of that year, when problems were brought to light. The audit found no evidence of failure to deposit checks before that. Deposits from credit and debit cards continued.
Auditors said they don’t believe that checks were stolen, but rather cash payments were taken and checks simply weren’t deposited. Permits from the building department were also issued free of charge without authorization. No cash was deposited from the building department to the treasurer’s office from Jan. 1, 2005 to Oct. 30, 2013, Anderson said.
It was the lack of check deposits that led to the discovery of a lack of cash deposits, Anderson said.
When asked who finally discovered that checks and cash were not being deposited, Anderson said he could not point to one individual.
“The way the county’s budgeting is, it’s based upon what the receipts are in the prior year,” Anderson said. “Because it was based on that, it’s not evident that the cash was deposited, and there was no way that the county could reasonably ascertain, through an analysis of the budget to actual variance, that there was no cash being deposited.”
The firm calculated that the total misappropriated funds were valued at $565,323.32, with $187.080.27 recovered, according to its preliminary findings. Total unrecovered funds totaled $378, 243.05, though Anderson said he expected the amount of recovered funds to increase. County Attorney Jack DiCola said the county believed another $90,000 could possibly be recovered.
County insurance will cover some of the losses, but Anderson said that there were some losses that wouldn’t be covered by insurance.
“It’s clear at the end of the day, the county will lose some money on this as far as absent insurance recoveries,” Anderson said. “Some money has been lost. Either checks were stale or there were instances where people paid their building permit in cash and said, ‘hey, we’ve already paid you, and we’re not going to pay you again.’ And there is very little documentation that we can use to recover from those individuals.”
The county hired Alvarez & Marsal to conduct the audit as well as review the county’s procedures for handling cash. During the audit, Anderson said his firm’s primary goals were to develop a timeline of activities that led to asset misappropriation, interview relevant personnel to understand their involvement in the building department’s activities and to quantify the amount of assets misappropriated to assist the county in potential recoveries through insurance.
The first open acknowledgement of financial issues within the building department began during the 2014 budget process, which started in August 2013. At that time the building department reported only $14,975 in income through June 30, 2013, though its budget was $170,000.
County Commissioner James Newberry said he wanted to move forward with determining the exact amount of cash that was recoverable in order to move forward with insurance claims, as well as consider budgeting to put new systems in place for cash handling.
“We need to get finance and everybody else affected and see what kind of timetable we’re looking at and how we deal with that,” he said.
Anderson said he would probably meet with county officials after July 4 to determine how to move forward.
Lack of oversight
The triangle of oversight between the building department, the treasurer’s office and the county’s finance director was one point that investigator’s identified as a problem area, Anderson said.
“The one part of the triangle that we were missing was a really direct link between the finance director and what was going on in the building department,” Anderson said.
The employee charged with embezzlement was responsible for collecting funds, filing accounting reports and maintaining the accounting system for the building department, which Anderson said also exhibited a failure in county policies regarding the segregation of duties.
“(There was) clearly no segregation of duties, and given that lack of oversight, that bright line between the county finance director and what was going on in the building department, there was a lack of internal control in that area,” Anderson said.
Lack of standard procedures
One finding of the audit was that the county does not have detailed standard operating procedures for managing cash, according to Tim Meighan of Alvarez & Marsal.
Some departments could not furnish auditors with standard operating procedures when asked, and some furnished them late.
In some cases, employees were taking cash home and keeping it overnight because they were unable to deposit it after hours with the county treasurer, Mieghan said. He recommended the county open channels for employees to deposit money after hours.
Social services and the county manager’s office were unable to provide standard operating procedures, though the county manager’s office furnished a cash handling policy from 2005, which Meighan called an overriding policy and not a standard operating procedure.
“I think we need to come up with a more broad county-wide cash policy and procedure, and this should be a very transparent document,” Meighan said. He recommended that each department develop its own standard operating procedures and that staff is trained in these procedures.
He also recommended that department heads sign off on financial activities yearly, and reconcile accounts monthly.
“At the end of the year, departments need to be accountable for the activity that goes on,” Meighan said.
Firm recommends centralization of accounting
After examining cash handling policies, the auditing firm’s primary recommendation to the county was that it centralize money collection in the treasurer’s office, Meighan said.
“I think the biggest thing we found was that every department collects their own funds,” Meighan said. “In best practices there should be one central location.”
The audit found that 110 employees in the county currently handle cash.
“The more hands you have touching cash the more likelihood there’s a potential of fraud,” Meighan said.
The audit determined there should also be more internalized controls surrounding the segregation of duties, meaning employees who receive money should not also enter it into the accounting system and deposit it. Meighan said not having enough staff in the treasurer’s office could lead to employees having too many responsibilities.
“We think we really need to focus staffing around having proper segregation of duties,” Meighan said.
Other problems included a lack of security in the treasurer’s office during hours when large amounts of cash are present and lack of a centralized accounting system.
Hank Shell can be reached at 970-887-3334 ext. 19610.
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