By Curtis Morrison

This will make you forget all about Metro Councilwoman Barbara Shanklin.

A secret audit of Louisville Metro government’s finances reveals 36  lapses of sound financial practices.

While 32 findings were leftover problems from 2010, four findings were new to the first financial statements released by Louisville-Jefferson County Metro Mayor Greg Fischer.

According to the independent accounting firm Crowe Horwath, one of the recent findings included “significant deficiencies” involving accounting errors.

Moreover, much of what’s in the audit involves the city’s nearly nonexistent monitoring of Metro Council funds, connecting to the ongoing Shanklin controversy.

What – you didn’t hear about any audits?

The mayor and Metro Council members received the audit findings more than six months ago.

Yet, those issues remained out of public view for months.

(Author’s note: Going back to before city-county merger, all United States governmental entities spending more than $500,000 in federal funds have been required to undergo an annual ‘Single Audit’ of their annual financial statements, sometimes called an OMB A-133. City officials are not legally required to make those audit findings public. Audit contractor Crowe Horwath has a one-year contract, renewable for five years, to complete annual independent audits of Metro Louisville’s financial statements.)

We’re going to tell you what the citizens of Louisville apparently were never meant to know.

But first, let’s look at how the mayor’s office handled this.

Last year, Christmas fell on a Sunday.

On the Thursday before the Christmas holiday, December 22, 2011, the Mayor’s Newsroom release titled its “First Yearly ‘Report to Citizens.’ ”

That report – three pages –  includes 11 photographs. The theme from Fischer’s inauguration –  “One City. One Community. One Family.” – is in the header.

“One year later, it’s time to look at how we’re doing. That’s what this report is about.” wrote Fischer on the first page. The rest is mostly happy news.

The report itemizes “steps we’re taking toward a better financial future,” “More 2011 Achievements,” and “Goals for 2012.”

The next day, Fischer got a 2-page letter from Crowe Horwath outlining the scope and limitations of their audit of the city’s Comprehensive Annual Financial Report for the fiscal year ending June 30, 2011.

Since the happy news “First Yearly ‘Report to Citizens’ ” was issued the day before the city technically had possession of the audit findings, one could argue a pass was in order here. One could.

The Crowe Horwath audit letter was addressed to the “Honorable Greg Fischer, Mayor and the Louisville Metro Council,” with the stipulation the general public should not have access:

“This report is intended solely for the information and use of the management, the Mayor, members of the Louisville Metro Council, the Kentucky Auditor of Public Accounts and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than the specified parties.”

The audit ended up being bundled with the Comprehensive Annual Financial Report, to make a single, 126-page document.

Steve Rowland, city CFO, would write a 38-word sentence in CAFR letter that embeds a curious detail – Crowe Horwath’s audit findings were “provided in a separate report.”

The “separate report” Rowland referenced is Crowe Horwath’s ‘Single Audit’ findings.

Fischer spokesman Chris Poynter says the city posts all annual audits here.

Here is Poytner’s response to our query:

Although the audit found some areas that need to be tightened and improved, we are very pleased with its findings, especially when compared to previous years. Three years ago, the city had numerous audit findings and we’ve reduced that to relatively few this year. Much of the credit for those reductions belongs with Chief Financial Officer Steve Rowland and his team. Steve’s decision to centralize all business operations in Management and Budget, from the individual departments, was a key reason for the reduction in major findings from prior years.

Here are those findings:

The Crowe Horwath audit found Waterfront Development Corporation had an extra secret bank account problem.

  • Finding 2010-1:

Condition: The Waterfront Development Corporation (“WDC”) had three bank accounts of which Metro Government was not aware. These bank accounts should have been included in Metro Government’s general ledger and financial reports.

Status: This finding was resolved in fiscal year 2011 with all bank accounts held by the WDC closed and transferred to Metro Government’s contracted bank accounts and reported in Metro Government’s financial system. Effective July 1, 2011, WDC is a component unit of Metro Government.

  • Finding 2010-2:

Condition: The WDC had a lack of segregation of duties over its cash accounts.

Status: This finding was resolved in fiscal year 2011 with Metro OMB providing improved controls over WDC’s financial transaction processes. Effective July 1, 2011, WDC is a component unit of Metro Government.

The Waterfront Development Corporation, if you didn’t know, oversees a bit more than Waterfront Park. The department also manages the Belle of Louisville and has developed the master plan for the redevelopment of Riverview Park in Southwestern Jefferson County.

So Crowe comes in and finds a Metro Louisville department has accounts, aka “money,”  the city doesn’t even know about.

The accountability wizards at City Hall have already begun implementation of a solution: Refine the Waterfront Development Corporation as a “component” of the Metro Louisville, so now their books won’t be considered in future “Single Audits.”

In the 2011-2012 budget cited that the Waterfront Development Corporation would become a component for “for more efficient operations.”

But “Notes to the last Financial Statements,” released in December, don’t beat around the bush:

Effective July 1, 2011, Metro Government negotiated a Fiscal Agent Agreement with the Waterfront Development Corporation (“WDC”) in which the WDC would become a component unit of Metro Government. Previously, WDC was considered a department of the government, and all financial information was incorporated in the financial statements. The WDC will have a separate annual audit and the information will be discretely presented in Metro Government’s 2012 CAFR.”

Discretely.

  • Finding 2010-8:

Condition: Firefighter’s Pension Fund (“Fund”) checks require two authorized signatures. However, a supply of blank checks with one signature is maintained.

Status: This finding was resolved in fiscal year 2011 with mitigating controls over cash disbursements. The Board of the Fund has accepted the risk of maintaining blank checks with one signature. However, the Board reviews all disbursements and the bank account detail at each meeting to mitigate the risk.

Considering how unlikely public servants are going to get what they were promised from their pension funds, as it is, it’s even more unsettling these folks are breaking rules.

  •  Finding 2011-02:

This is the finding that Crowe Horwath found to be a “significant deficiency,” essentially a million-dollar accounting error.

Condition: During fiscal year 2011, Metro Government identified and corrected an error that resulted from not using the effective interest method for amortization of amounts deferred on bond issuance costs, bond discounts or premiums and deferred amounts on refundings. Metro Government was using a straight line amortization that they believed would provide a similar result to the effective interest method required by GAAP. As a result of this error, Metro Government recorded a prior period adjustment to decrease beginning net assets by $1,020,469 and decrease related assets and liabilities.

In addition, Metro Government identified and recorded a prior year adjustment to decrease beginning net assets by $2,280,098 to record accrued interest payable on long-term obligations at the end of fiscal year 2010.

(Followed by reasons the Fischer administration says it won’t happen again.)

  •  Finding 2011-01:

During our audit procedures in the loans receivable area, we discovered an error in the reconciliation process related to bankrupt loans subsidiary and general ledger which resulted in an audit adjustment of $2,383,845 to increase loan receivable.

Again, there are long paragraphs where Metro Louisville  government officials explain how $2.4 million in accounting mistakes won’t happen in the future.

  •  Finding 2010-03:

Condition: Certain Metro Council grant funds distributed to an organization could not be fully substantiated with supporting documentation as to who received payment and the purpose of all the funds. A policy and process should be implemented to ensure proper tracking and monitoring to ensure grant funds were expended for the designated purpose and adequate supporting documentation for the expenditure is maintained.

Status: This finding was resolved in fiscal year 2011. A Metro wide policy regarding the tracking and monitoring of Neighborhood Development Fund (“NDF”) grants was developed and implemented in March 2011. The policy addresses monitoring of NDF funding granted out to 501c3 organizations. In addition to implementing this policy in March 2011 for NDF grants issued from that point forward, OMB went back to all NDF grants issued in fiscal year 2010 and from July 2010 through February 2011 and conducted a monitoring review of those grants. Also, when business operations were centralized into OMB effective July 1, 2011, an NDF coordinator position was created under the Grants Compliance Division. This employee is dedicated to the NDF monitoring process.

Wait. Auditing of Neighborhood Development Grants? Why is that familiar?

Despite the March 2011 and July 2011 policy updates, and the creation of the NDF coordinator position, all announced, sort of, in the Single Audit released at Christmas, one metro councilman wasn’t satisfied.

Metro Council President Jim King had requested the Office of Internal Audits review the Neighborhood Development Fund grants for the last two years. The office completed the review for King on June 26, 2012, and I’ll be darned if the C-J didn’t have it online by June 27, 2012.

Now, everyone’s a buzz about the scandal with Neighborhood Development Grants.

Neat how that works.

  •  Finding 2010-32:

Another finding from the audit foreshadows the stories now being “broken” by the C-J on Councilwoman Shanklin.

We don’t know how it happens, exactly. People who know about the audit could have possibly cherry picked when to share those findings, and with whom.

From the audit:

Agreements Related to the Weed and Seed Program Should Be More Carefully Monitored.

Status: This finding was resolved in fiscal year 2011. The conflicts of interest identified have been resolved by removal of the Councilperson identified from the Board of Directors of the identified organization.

It appears on Weed and Seed’s Metro Louisville webpage, the Board’s chairman is Adrian Shanklin.

Whether Adrian Shanklin is related to Weed and Seed board member and Councilwoman Barbara Shanklin, the Councilwoman’s niece and board member Dianna Walker, or the board member and Councilwoman’s Legislative Aide David Riggs, is unclear.

One thing that is certain – Crowe Horwath raised concerns about Weed and Seed to the Mayor and the Metro Council in 2011.

Now we’re at six months later, and CJ reporter Dan Klepal is breaking news on Shanklin like he’s Lois Lane getting tips from Superman.

Why was the public denied all the information from the Crowe Horwath report?

Maybe the Mayor was waiting for the right time ….

In Fischer ‘s January 12, 2012 State of the City Address, he talked about a pending $12 million budget. He included a dire anticipation of a $20-$30 million shortfall for next fiscal year. (Which we’ve since started July 1, 2012.)

Fischer said we have to work “smarter and more efficiently,“ and “we must find MILLIONS of dollars to cut.”

Fixing the structural budget problem was only the first of Fischer’s goals for 2012. The other four goals included “delivering excellent city services,” “taking job creation to the next level,” “investing in our people and our neighborhoods,” and finally, “planning for a 25-year ‘city vision.’”

Like December’s “Report to Citizens,” Fischer must not have believed the “State of the City Address” was “the right time” to mention the audit’s findings.

It’s starting to look as if there never was going to be a “right time.”

Annual audit findings never seem to have debuted in the Mayor’s Newsroom. Ever.

A little snooping on the ‘Net indicates this practice was a holdover from Lt. Governor Jerry Abramson’s time as Louisville’s mayor.

Christmas 2010’s “To the Citizens of Louisville” letter from Abramson also accompanies a Rowland letter with the same line saying audit findings were “provided in a separate report.”

There’s not room here to do Abramson’s audits justice, but the word “discretely” was actually used 14 times in his last report.

Takeaways:

  • The Fischer Administration has kept adverse audit findings on the workings of Metro Government from the public. And we’re talking about 36 adverse findings, with one classified as a “significant Deficiency.”
  • Many of those findings were not done justice here, and need further investigation. Waterfront Development Corporation, of course, but it shouldn’t stop there.
  • Might not be a bad idea to procure the “Single Audits” from under Abramson’s administration to, um, see what we missed, so to speak.

Most importantly, though, that old conventional wisdom where the mayor’s office controlled what gets printed in the C-J?

Newsflash: They’re still playin’ us. Only this time, they’ve been caught.

About Curtis Morrison: Curtis Morrison is a journalist who blogs at Louisville Courant. Morrison is a political activist, active in historic-preservation efforts. He is a board member of Neighborhoods Planning and Preservation.

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7 thoughts on “Curtis Morrison: Secret Metro Louisville audit reveals 36 lapses of sound financial practices – and you didn’t hear a peep about it

  1. Charles- You’re 100% correct that we should and will. But to be fair, we didn’t even realize there was an annual outside audit completed on the city’s financial statements until I stumbled upon it Sunday- by complete accident. Ask around, this annual audit is not common knowledge, and that’s just bizarre.

    Don’t forget, the day the audit was theoretically “made public,” it wasn’t. Never has been. The only press release to come out of the mayor’s newsroom on that day was that Southern Living contest.

  2. Charles- You’re 100% correct that we should and will. But to be fair, we didn’t even realize there was an annual outside audit completed on the city’s financial statements until I stumbled upon it Sunday- by complete accident. Ask around, this annual audit is not common knowledge, and that’s just bizarre.

    Don’t forget, the day the audit was theoretically “made public,” it wasn’t. Never has been. The only press release to come out of the mayor’s newsroom on that day was that Southern Living contest.

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