Palermo’s financial practices criticized in state audit; remedies ordered

PALERMO — The town was recently cited by state Comptroller Thomas DiNapoli for not filing their annual financial reports, bureaucratically known as annual update documents (AUDs), in a timely manner in 2016, 2017, 2018 and for the town’s 2018 and 2019 books only being completed after a state audit began looking into these oddities in January 2020.

According to Tania Lopez of the Office of the State Comptroller, “While many local governments occasionally file an AUD untimely, it is not common for any group of municipalities, including small towns, to consistently file AUDs as late as the town of Palermo has done.”

Again, according to Lopez, DiNapoli found no indication of any misappropriation of funds, and no further investigation is planned, but certainly the town Supervisor Patricia Redhead and the town’s four-member board came in for some serious condemnation from the state’s top financial watchdog in his August report, and changes in the town’s financial procedures will be required.

Here are some highlights from DiNapoli’s report and the town’s official response to DiNapoli. Numerous requests made to the town clerk for interviews with the town supervisor or members of the board resulted in no word from any of them.

According to DiNapoli’s report:

The supervisor is responsible for maintaining the town’s financial records, should maintain an accurate and complete account of all funds received and disbursed, and deposit town funds within 10 days after receipt.

The supervisor is also responsible for providing monthly reports to the board summarizing financial activities. These reports should include a detailed statement of all money received and disbursed during the month.

Complete, accurate and timely financial information is essential for a board to make sound financial decisions.

New York State Town Law requires the supervisor to submit an annual accounting to the board on or before Jan. 20 for all money received and disbursed during the preceding year, unless an independent public accountant has been hired to audit the supervisor’s records within 60 days after the close of the fiscal year. As part of the annual accounting, the supervisor should provide the board with all supporting books, records, receipts, warrants, vouchers and cancelled checks or check images.

Furthermore, New York State General Municipal Law (GML) requires the supervisor to file an annual update document (AUD), which is the annual financial report, with the New York Office of the State Comptroller (OSC) within 60 days of the end of the town’s fiscal year (Dec. 31), unless an extension is granted.

When we first contacted the supervisor in December 2019, she told us her records were not current because of personal matters and that she intended to bring them up-to-date before our audit.

We began our audit on Jan. 7, 2020. At that time, the supervisor provided us with access to some records for 2018 and 2019 (e.g., payrolls, claims, check registers and bank statements), but the records did not include revenue spreadsheets or the general and subsidiary ledgers. The supervisor told us she finished the fiscal year 2018 ledgers, but needed to retain them to carry balances forward to complete 2019.

She gave us the 2018 general and subsidiary ledgers on Jan. 14, 2020, the 2019 general and subsidiary ledgers on Jan. 21, 2020 and the revenue spreadsheet for 2018 shortly thereafter.

We did not receive the 2019 revenue spreadsheet until Feb. 26, 2020. Once we were provided with all of the 2019 accounting records, we reviewed them and found they were up-to-date. We verified that the adjusted bank balances agreed with the general ledger cash balances. We also examined a sample of source documents for receipts and disbursements and found they were all entered in the ledgers.

During our review of the 2019 accounting records, we noticed that cash receipts were not always deposited within 10 days after receipt or recorded in a timely manner. We reviewed the town clerk’s and town justices’ monthly reports for 2019, traced them to the supervisor’s bank deposits and accounting records and found the supervisor typically made deposits about 35 days after receipt, on average.

Also, the September cash receipts totaling $4,487 were not deposited until Dec. (three months later). When funds are not deposited in a timely manner, it increases the risk that the funds could be lost, stolen or misappropriated. The supervisor typically recorded revenues at the end of each month. However, November receipts totaling $3,936 were not recorded until Dec. 31, 2019. When transactions are not entered into the accounting records in a timely fashion, the supervisor cannot report accurate financial information to the board, and the board will not have reliable information on which to base management decisions We also traced total 2019 disbursements from bank statements to the supervisor’s records and did not find any discrepancies. The supervisor did not routinely provide the board with reports showing cash receipts and disbursements each month or cash balances for each fund. The supervisor was unable to prepare these reports because she did not maintain timely accounting records.

We compared the December 2019 budget-to-actual report for expenditures to the general ledger and found that most (98%), but not all expenditures, were included on the reports. For example, the budget status reports did not include $12,992 of payroll fees and $11,048 of snow removal personal services costs.

Timely, sufficient and accurate accounting records are essential for the preparation of appropriate financial reports that help the board monitor and manage financial operations and assess and make decisions regarding the town’s financial condition. The lack of timely and accurate financial information could lead to errors going undetected and uncorrected and could also hamper the board’s ability to make sound financial decisions.

The supervisor was 841 days late in filing the AUD for the 2016 fiscal year.

After our fieldwork ended, the supervisor filed the 2017 AUD on March 17, 2020 (747 days late) and the 2018 AUD on April 10, 2020 (406 days late).

An annual audit of the supervisor’s records and reports helps the board fulfill its fiscal oversight responsibilities by providing it with an opportunity to assess the reliability of the town’s records and supporting documents. It also serves to identify conditions that need improvement and can provide useful information to help the board monitor the town’s financial operations.

Although the board annually audited the town’s Justice Court, it was unaware that it should also audit the supervisor’s books and records.

The supervisor told us she did not present her 2018 records to the board for an annual audit, and board members did not request to review them.

The board indicated that it will annually audit the supervisor’s records going forward.

The board budgeted an appropriation of $20,000 in the 2020 budget to hire a certified public accounting firm to conduct an independent audit of the 2019 records.

Had the board conducted the required audits, it would have noticed that the accounting records were not up-to-date, deposits were late and the AUD had not been filed.

Because the board did not conduct or contract for an annual audit, it could not fulfill its fiscal oversight responsibilities of assessing the town’s books, records and supporting documentation and monitoring the performance of town officers and employees who are entrusted with recordkeeping and other financial responsibilities.

Highlights from the town’s official response to DiNapoli:

The town board acknowledges the findings and agrees with those findings.

The town supervisor fully acknowledges lack of timeliness on completing the financial records and has discussed with the board and the state auditors the personal reasons behind that.

For each recommendation included in the audit report, the following is our corrective action(s) taken or proposed.

The supervisor shall take and has taken the following immediate actions in compliance with this corrective action plan:

The supervisor shall ensure that all financial records and reports are complete, accurate and up-to date on an ongoing basis.

The supervisor shall submit monthly reports to the board that include a detailed accounting of all funds received and disbursed, cash balances and complete budget-to-actual comparisons of revenues and expenditures for each town fund.

At this time the supervisor has provided to the board the following up to date records:

a) Completed and filed 2019 AUD report. In addition, all prior and up-to-date AUD reports have been filed with the town clerk’s office and are available for the public.

b) Opening balances and general ledger balances for all accounts for the 2020 fiscal year.

c) Monthly reporting of all accounts and balances for 2020 through June 30, 2020. July 31 bank statements are not yet available.

d) Monthly revenue reports in detail; receivables to budget comparison.

e) Monthly disbursement reports in detail; disbursements to budget comparison.

f) Copies of bank statements shall be provided upon request to any board member, but shall be reviewed monthly by the deputy supervisor and/or another designated board member to ensure accuracy and timeliness.

Going forward, the supervisor shall provide to the board the preceding monthly reports at the monthly town board meetings. Copies of those reports shall be maintained for future auditing purposes.

Furthermore, all received funds shall be deposited no later than 10 days after receipt. If the supervisor is unable to conduct such deposits, then the town board shall authorize the deputy supervisor and/or bookkeeper to act on her behalf for such transactions.

In further discussion, the supervisor acknowledges that there are several updated government accounting standards that the comptroller’s office is requiring and that the financial statements should be in accordance with GAAP (generally accepted accounting principles).

With the knowledge that the town supervisor is not a certified public accountant and with the knowledge of such government reporting standards; the board acknowledges that they must seek the professional knowledge and assistance of a CPA firm.

To date the town board has taken the following immediate actions:

a) Contracted with a certified public accounting firm to conduct an independent audit of the 2019 accounting records of all departments. That audit is currently in progress.

b) The board has requested the recommended appropriate reports to be submitted monthly at each town board meeting and those shall be entered into the record of the meetings and copies retained.

c) Ongoing, the board shall budget annually to engage the services of a CPA to complete the annual financial statement and/or AUD to meet the required governmental accounting standards.

d) In addition, the CPA firm will conduct an independent review of all departments and submit such review to the board for compliance with the annual auditing requirements and filing.

e) The board will continue to monitor such findings for recommendations and improvements on a regular ongoing basis.

At this time, the supervisor in conjunction with the town board and the town clerk’s office is investigating accounting and records software updates that would be beneficial to the board and the departments in maintaining budget revenue/disbursements on a daily basis. The current system is a combination of several methods. It is the board’s plan to streamline this process into one complete electronic recordkeeping and bookkeeping system.

The town board of Palermo and the town supervisor acknowledge the seriousness of this situation and have taken the appropriate action at this time to ensure that all records are current. The additional assistance of a certified public accounting firm on an ongoing basis will assist in maintaining these records in a timelier manner as required.

We as a town board appreciate your assistance in completing this audit review and look forward to the future with a better understanding of the audit process.

From DiNapoli’s explanation of the audit methods involved in this report:

We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.

The board has the responsibility to initiate corrective action. A written corrective action plan (CAP) that addresses the findings and recommendations in this report should be prepared and provided to our office within 90 days, pursuant to Section 35 of General Municipal Law. We encourage the board to make the CAP available for public review in the town clerk’s office.

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