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audit letters

More on the audit letters

The Chron asks some outside experts to go over those recently released audit letters.

BagOfMoney

Houston leaders appeared to have ignored the significance of recurring accounting and management problems or did not have the resources to fix them, according to accounting experts who reviewed 11 years’ worth of audit letters released by the mayor’s office last week.

“It really affects the ability of the government to manage its activities well,” said Douglas Carmichael, a professor at New York’s Baruch College with decades of experience as a CPA and writing accounting standards. “There seem to be errors permitted that a good system would prevent or detect.”

Carmichael and others noted, however, the number of weaknesses that could lead to inaccurate record-keeping or fraud had decreased in recent years.

The public release of the audit letters comes as the city’s Finance Department is readying a proposal to analyze accounting and financial procedures throughout every city department with an eye toward resolving persistent problems and preventing new ones.

The goal, Finance Director Kelly Dowe said, is to get department directors to consider financial transparency and accurate bookkeeping as important as the community services they provide.

[…]

The letters by the city’s outside auditor, Deloite & Touche, identified bookkeeping problems and areas with little oversight that could be tempting targets for fraud.

They noted millions of dollars’ of inaccuracies in financial statements that needed to be corrected before the city could issue its annual financial report. The auditors found that although money did not appear lost, it sometimes was not moved to the correct account on time, or financial statements did not reflect the true balance after a review of debits and credits. The auditors attributed some of those problems to inadequate communication from departments and a limited finance staff.

The letters also highlighted management deficiencies, such as failing to adequately track inventory or failing to require a collections contractor to provide documentation that it had properly billed for its services.

Some years, auditors suggested dozens of fixes, and some problems were identified repeatedly over the years before being addressed.

“It sounds like they just tossed it to the auditor and said, ‘You fix it,’‚ÄČ” said Tarrant County Judge Glen Whitley, founder of a firm that performs the same kind of audits.

Whitley and other auditing professionals noted that Deloitte confirmed the financial statements as “clean” every year, despite the problems found. They said it also was promising that the most recent letter listed just four deficiencies, two of which were “significant,” rather than dozens.

The auditors probably would not have OK’d the revised financial statements if they had found actual wrongdoing or grave errors rather than just the potential for them, said Jacqueline Reck, past president American Accounting Association’s Government and Nonprofit Section.

See here for the background. Again, it doesn’t look like there was anything major in these letters. The bigger problem was in the city’s inability to address the issues in a timely fashion, though clearly progress was made. The bigger question is why City Controller Ronald Green thought they shouldn’t have been released. He had an AG opinion saying they didn’t have to be released, but against that there was the standard practice of other cities to release them, and the lack of any apparent cause for concern. He hasn’t had anything to say about it so far, which is too bad because I’d really like to understand his thinking. I hope he breaks his silence and tells us why he did what he did.

Audit letters

There’s a thing called audit letters that I hadn’t known existed. We’ve got them for Houston, but we had not been making them public even though other cities do as a matter of course.

City Controller Ronald Green

City Controller Ronald Green

Houston officials have blocked the release of letters detailing weaknesses in the city’s financial accounting even though other large Texas cities routinely share such letters as a matter of transparency.

“What are they trying to hide, if anything?” asked Kelley Shannon, executive director of the Freedom of Information Foundation of Texas. “The financial business of a government entity is everybody’s business. It’s our money, and it’s our government.”

State law requires public agencies to hire an external auditor to review finances each year, ensuring that governments accurately portray their fiscal health in reports to leaders and the public. When that audit is complete, the full report is accompanied by a management letter that notes any apparent problems with accounting procedures uncovered while testing the accuracy of financial statements.

[…]

Though [City Controller Ronald] Green previously had said he supported the release of the letters, he has deferred to the city attorney’s office, which sought an opinion from the Texas Attorney General’s Office on whether the city was required to release them.

Green last week did not respond to questions emailed to his office seeking further explanation of his stance, instead releasing a two-sentence statement. “Heretofore, Management Letters have not been disclosed based on direction from the City Attorney and Texas Attorney General. The City of Houston will continue, until advised otherwise.”

The attorney general’s office earlier this month issued an opinion saying the city did not have to release the audit letters.

“This is a discretionary section that city may elect to raise. It is not required,” wrote attorney general spokesman Jerry Strickland. “If other cities choose not to raise this exception and would rather release similar information, they have that option.”

[…]

Last October, City Controller Green refused to release the letters from the last 10 years when frequent city critic Bob Lemer and, later the Chronicle, requested them under the Texas Public Information Act.

At the time, Green said he believed the records should be public but deferred to the decision of the city attorney’s office and Texas attorney general. “I do not practice law here,” he said. “When it comes to Bob Lemer, he’s still looking for ways to gain legal standing over the city on Proposition 2.”

Lemer, a retired partner at Ernst & Young, said the refusal to release the letters bolsters his arguments that the city is hiding the extent of its financial troubles.

“They will not let the public know what a horrible mess the entire accounting system is,” he said.

In its letter seeking an opinion from the attorney general, the city attorney’s office cited an exception to the Texas Public Information Act allowing cities to decide whether to release “audit working papers,” generally seen as communications with city employees that auditors use to prepare their reports or incomplete drafts of their reports.

Lemer may well be a crank, but that doesn’t mean he’s wrong. Whether he is or he isn’t, withholding this information does give him an air of authenticity, and a lot more grist for his grievance mill. A followup story in the Chron quoted several Council members who were also mystified by this and who called for the letters to be released. I don’t know what purpose was being served here, but in the end Mayor Parker stepped in and made the right call.

Amid questions from City Council members about the propriety of keeping them secret, the mayor’s office on Wednesday released audit letters detailing weaknesses in the city’s financial accounting.

[…]

The mayor’s office released 10 years of the audit letters, totaling 96 pages but did not include the appendices, which may include more detailed explanations of deficiencies identified by auditors. A spokeswoman said the mayor’s office released what the controller had sent to the city attorney last October and directed the Houston Chronicle to seek the appendices from Green.

[…]

“It sounds like exactly the right decision,” said Kelley Shannon, executive director of the Freedom of Information Foundation of Texas, said of the letters’ release. “The more the public can review what’s being done with their money, the better.”

The most recent letters sent by outside auditors Deloitte & Touche on Dec. 18, 2012, noted three areas in which projected revenues appeared to be understated. Those three – $2.5 million in Municipal Courts, $2.9 million in “other revenues” and $4 million in construction activities – were deemed by city officials to be immaterial to the overall financial statements, and were corrected in the city’s annual financial report.

An appendix provided by Councilman Jack Christie’s office noted “significant deficiencies,” a term used by auditors to highlight policies or actions that could let inaccurate record-keeping or fraud go undetected.

“While there was significant improvement in the City’s financial reporting process in the current year, the City should enhance this process by requiring responsible financial reporting personnel, at the department level, to perform analytical reviews of financial results on a periodic basis,” the auditors wrote.

The 2003 audit letter listed 35 recommendations; the 2012 letter made only 10.

City finance department officials said in a written statement that they have addressed the findings, noting 2012 was the first time in 10 years that external auditors deemed the city a low risk for accounting errors in federally funded programs.

“There are less complaints than in 2003, and they are not that serious,” said Steven Craig, a University of Houston economics professor. “I’m not sure why they wouldn’t want to release that letter.”

You and me both. Houston Politics has a copy of the audit letters themselves, in case you’re curious. The original story says that the AG’s office issued the opinion in question “earlier this month”, but neither of the two opinions I see for 2014 on the index page have anything to do with Houston. In any event, this appears to be the end of this episode of mountains-from-molehills manufacturing.