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Washington State Auditor’s Office informs Mill Creek City Council of internal controls issues

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Based on these financial and accountability audits they conducted in 2016, the State Auditors informed the Mill Creek City Council on March 16, 2017, of a number of internal control “matters” that require improvement.

By Richard Van Winkle, News of Mill Creek.

Editor’s note: This April 14, 2017, article was corrected on April 25, 2017, to make it clear that the shift to annual financial and accountability audits was solely because of the State Auditor’s Office Audit Policy 1210 and not because of recent finance department turnover and management letter recommendations.

It takes a long time to review the financial and management operations of a city the size of Mill Creek. The Washington State Auditor’s Office just recently released their reports for the period from January 1st to December 31st, 2015.

Based on these financial and accountability audits for fiscal year 2015 that they conducted in 2016, the State Auditors informed the Mill Creek City Council on March 16, 2017, of a number of internal control “matters” that require improvement.

The Washington State Auditor’s Office audits more than 3,000 local governments in order to assess how public resources are managed and to ensure public funds are not misused.

State statutes require the Washington State Auditor to review the financial practices of all local governments at least every three years. According to their website, “The timing and scope of audits are based on risk analyses that consider such factors as size, analytical procedures and prior audit history.”

Additionally, the City of Mill Creek is subject to Audit Policy 1210, which had it's most recent update on May 25, 2016. It requires all governments with over $10 million in annual revenue to receive annual financial and accountability audits.

Mill Creek had a series of clean audits with no issues, which allowed the State Auditor’s Office to grant a temporary exemption from annual audits from 2013 to 2014.

According to Kristina Baylor from the Washington State Auditor’s Office, the state will now audit the city annually. She wrote in an email that the audit frequency change was being made “solely” because of Audit Policy 1210.

Baylor also wrote that recent finance department turnover and management letter recommendations would keep Mill Creek from receiving another exemption to the annual audit policy “at this time.”

According to the State Auditor’s Office staff turnover played a part in minor errors in Mill Creek’s 2015 financial statement.

In a March 16, 2017, letter to the Mill Creek City Council the State Auditor’s Office wrote, “Our review of the financial statements and schedules noted a deficiency in the City’s internal controls over the preparation and review of the financial statements.”

“The City experienced significant turnover in key finance personnel during the period. The senior accountant responsible for preparing the financial statements left the City and as a result the city hired the former Finance Director on contract to prepare the City’s financial statements and notes. The City hired a new Finance Director in May of 2016, subsequent to the preparation and submission of the financial statements.”

“While our audit found an informal review of the financial statements was conducted with the former Finance Director and the City’s two Accounting Specialists, this review included discussion over how the statements and schedules were prepared and did not include a detailed review by someone independent of the preparation process.”

Mill Creek Director of Finance Peggy Lauerman summarized some of the State Auditor’s findings to the Mill Creek City Council at their March 28th regular meeting.

Lauerman said city staff already knew about a number of the issues that were discovered by the auditors. Although Mill Creek employees want to do the right thing, Mill Creek’s policies and procedures aren’t complete and up to date.

She said that their continuous improvement efforts over the past two years and the 2016 Loaned Executive Management Assistance Program (LEMAP) police department study disclosed “the same theme coming up in the exit conference (State Auditor’s Exit Conference).”

Lauerman said there were some problems with the transition to the New World software used by the Mill Creek Police Department beginning November 4, 2015.

The State Auditor’s March 16th letter to the Mill Creek City Council listed the following issues with the New World software implementation:

  • “The Department did not conduct a property room audit to ensure that all inventory was properly recorded in the new system.
  • The new software has an audit function that allows a reviewer to see changes and deletions made to property room inventory. Although the audit function is enabled, the audit report is not being reviewed by an independent party.
  • The Police Department records permits and licenses in the new software system and receipts the related fees in the general ledger; however, no reconciliation is performed between the software system and the general ledger to ensure all transactions are recorded in both system.
  • The City does not have a procedure in place to ensure a regular, independent review of user access levels in the new software system.”

Lauerman said that her department’s current work plan includes going through a security matrix to ensure appropriate user access in the New World software at some point this year. She did not say how the other issues would be addressed.

The State Auditor found seven discrepancies as a result of these “control weaknesses.” They wrote, “Specifically, we were unable to locate recorded jewelry, firearms, drugs and $20 cash.”

At their March 28th regular meeting Mill Creek Police Chief Greg Elwin assured the city council that none of these items were actually lost.

“We were able to go through and address each one of those during the audit process and determine that although there were discrepancies in record keeping, nothing was missing,” reported Elwin.

The State Auditors identified a number of issues with the use of credit cards in 2015. Among other things they found “instances where employees purchased meals for people who did not work for the City” and expenditures for employee recognition that could be construed as “prohibited extra compensation.”

Their March 16th letter to the Mill Creek City Council recommended the following internal control changes involving the use of credit cards:

  • “Update and/or develop formal written policies that govern the use of City funds to purchase items for employee appreciation and recognition, meals with meetings and volunteer compensation.
  • Perform adequate monitoring or (sic) credit card transactions to ensure that employees maintain all receipts and support to verify the validity and business purpose of each transaction.”

At the March 28th city council meeting Lauerman said her department would be working to bring Mill Creek policies and procedures up to date in order to avoid these issues in the future.

Interestingly, there were no questions from Mill Creek City Councilmembers after Lauerman's report.

Click on the following link to read the Washington State Auditor's letters to the Mill Creek City Council:

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