Auditors caution Oak Bluffs to attend to finances

— File photo by May Deary

Oak Bluffs selectmen got a sobering warning Tuesday from independent auditors Powers and Sullivan about the town’s financial condition. The auditor’s report, delivered at the weekly selectmen’s meeting, followed a just completed audit of fiscal year 2011, which ended on June 30, 2011, one year ago.

Jim Powers, partner in the certified public accounting firm Powers & Sullivan, acknowledged that the staffing, revenue, and budget issues that led to the town’s recent financial distress have improved, and in some cases substantially improved. But he told selectmen the town is not on solid financial footing. He framed the audit in terms of a family budget.

“You were $402,000 in the hole,” Mr. Powers said. “You pretty much broke even in fiscal year 2011, which is good, but it’s not getting you anywhere. You’re living paycheck to paycheck, and you’re living on your credit cards. There are a lot of communities that are in better shape than you.”

The audit found no material weaknesses in the town’s accounting procedures. Auditors define a material weakness as a deficiency in internal controls that create a reasonable possibility that errors in financial statements will not be prevented, detected, or corrected.

Powers and Sullivan’s 14-page management letter highlighted recommendations for improvement, many of which were included in previous audits, but remain unresolved.

Town administrator Bob Whritenour said his finance staff is working to correct many of the problems noted by auditors.

“There are a number of these items that, in the current fiscal year, we’ve made a tremendous amount of progress on,” Mr. Whritenour said. “We need to take these items one at a time and make sure they’re nailed down.”

Old businesses

Of the 16 recommendations Mr. Powers included in his previous year’s management letter, two were resolved, he said in the management letter delivered to selectmen. The town has put in place a centralized system to track vacations, sick time, and compensatory time. It has also made a significant change in the way it accounts for liens on the surcharge collected from taxpayers under the Community Preservation Act.

The other 14 recommendations in the management letter are classified as unresolved, or partially resolved. They include establishing a management plan to collect outstanding balances owed to the town’s emergency medical service, and to write off uncollectable bills; complying with federal and state employment laws for accumulating vacation and compensatory time for police officers; better accounting of deficits in funding for police details, and establishing formal policies and procedures for financial operations.

“I can go on autopilot and go through most of these things,” Mr. Powers said. “Let’s get an action plan on these things. We don’t have that right now.”

New recommendations

Mr. Powers also submitted three new recommendations that stem from the most recent audit. He said that from an auditor’s point of view, the town paying invoices without proper documentation was the most troublesome practice.

The letter highlighted the town’s dredging of a channel in Sengekontacket Pond, funded by a $500,000 loan approved by taxpayers and by sale of dredged sand to a private homeowners association.

“While reviewing expenditures paid during the year we noticed that the town incurred costs of approximately $415,000 in connection with a dredging project,” the auditors wrote in their management letter. “Of this amount, we reviewed one voucher, in the amount of $277,000 which was partially paid to a vendor and partially paid to another town. The support did not provide evidence showing that either payment was proper. The only support provided were numbers handwritten on notepad paper, however, there was no evidence that the project manager for the town approved the invoice, nor was their anything to indicate the party that created the invoice.”

Mr. Powers said the town should have rejected the invoice and demanded proper documentation.

“There is no excuse not to have that,” Mr. Powers told selectmen at Tuesday’s meeting. “That is significant. The accountant should have said, ‘no, I’m not paying that.'”

Mr. Powers noted that the discrepancy happened when the town was struggling with an understaffed finance department and before the town replaced the full-time accountant who retired in 2009. He said in other circumstances, the discrepancy may have been classified as a material weakness, a more serious deficiency in accounting practice.

“You are in a state of flux,” he said. “There are a lot of mitigating factors, but it’s serious.”

The audit noted several other instances where there was “less than ideal” documentation submitted with invoices.

“We reviewed invoices that appeared to be related to travel and cell phone cost reimbursements,” the auditors wrote in their management letter. “In some of the instances we were unable to determine either how the cost incurred translated into a town liability, or whether or not the stated cost was appropriately documented or stated.

“In the case of travel costs, information was presented that suggested that costs were incurred to send people to offsite locations but there was not clear evidence to suggest that the town benefitted from the cost.

“We encountered one situation in which an employee was reimbursed for airline fares for an out of state conference. The reimbursement was made prior to the conference being held. When we reviewed the related support we saw a handwritten note indicating that the trip was cancelled due to sickness, however, we were not provided with support that would suggest that the employee repaid the reimbursed costs of the airfare.”

Financial fixes

Selectmen said that the audit, which was months late because of transition in town government and understaffing in the financial department, covered a period during the most trying period of the town’s financial struggles.

Chairman Kathy Burton noted that town manager Bob Whritenour is addressing many of the recommendations in the audit letter, and the town’s financial department is now fully staffed. The town hired Arthur Gallagher, an experienced municipal accountant, in May.

“We are in the process of doing strategic planning,” Ms. Burton said. “I feel confident if we spend a good year of work, we can take care of the financial policy and procedure items.”

Mr. Whritenour has listed eliminating many of the unresolved recommendations made year after year in the auditor’s management letter as a top priority.

He noted that year-end accounting for fiscal year 2012, which ended June 30, already indicates the town’s free cash deficit is improving. He told selectmen that local receipts, that part of the town’s revenues that comes from the harbor, fees, excise taxes, and sources other than property taxes, increased by $265,863 last year, compared to the previous year.

“This represents a significant turnaround in our revenue collections, and keeps the town on target for our goal of eliminating the free cash deficit,” Mr. Whritenour wrote in his report to selectmen.

“I think they were pretty thorough,” Mr. Gallagher said. “I think I have my work cut out for me.”