BEAVER ISLAND: Rehmann audit results of St. James sewer fund

Beaver Island's St. James Township

Beaver Island’s St. James Township Hall is pictured last winter.

BENJAMIN J. GOHS, NEWS EDITOR

The murky St. James Township sewer fund record-keeping mess became clearer this week as investigation details were released to the public.

An independent audit of the Beaver Island municipality’s financial records reveals numerous questionable accounting practices, a lack of transaction records, over $130,000 in sewer fees not billed or uncollected from users, moneys moved from fund to fund without board approval, apparent confusion on assignment of duties, and using small business bookkeeping software to operate a governmental entity … among other issues.

 

 

“Clearly, the trend of the sewer fund is to continue borrowing from other funds to pay for operations and to provide funds for bond and interest payments,” wrote Stephen M. Peacock of the financial auditing company Rehmann Group, which has an office in Traverse City. “This practice is contrary to normal accounting practice and the legality of such transfers, without board approval, may be problematic to the board and the citizens of St. James Township.”

St. James Township civil counsel Bryan Graham—who was directed to hire Rehmann to perform the independent audit on the township—presented Peacock’s report by conference call to township board members during an Oct. 20 meeting in St. James Hall on Beaver Island.

“[T]he township board authorized me to engage the services of an independent accounting firm to conduct a full and independent audit of the township sewer system records,” Graham stated in an Oct. 14 memo to the St. James Township Board… “Stephen M. Peacock was the principal in the accounting firm who was in charge of the project. As the project moved forward, it became apparent that there was a need to review other township financial records, so that the board could rely on the financial information being provided to make informed decisions.”

Graham added, “As you will see, Mr. Peacock’s report is broken down under various captions. Within each caption are recommendations for future township action. I concur with the recommendations from Mr. Peacock and would urge the township to implement these recommendations as soon as possible, if they have not been already implemented.”

The issue involving St. James Township’s sewer system woes originally became public when the matter was announced during a public meeting on March 4. SEE RELATED STORY HERE

The draft report also contains space for a response from the board. Graham explained that the response is an opportunity for board members to provide any “factual information in response to the observations made by Mr. Peacock and his staff performing the activities in the study.”

He also emphasized that the information to be included in the response should be factual in nature and not personal opinions.

He also advised that, since there may be multiple responses from multiple officials, the proposed responses be provided to St. James Township Board member Kitty McNamara, who also acted as the chair of the ad hoc committee in charge of this project.

Any board responses will be added to the report and presented in the final version by Rehmann.


In the draft report, entitled “St. James Township Sewer Funds Assessment/User Fees Analysis and Report” dated Oct. 13 of this year, Peacock explains that his firm was hired to determine the operation of St. James Township’s Special Assessment District which expanded into an operational assessment of sewer use activity, recording of general ledger activity and an overall assessment of the operations of special assessments, sewer extension from the post office to 450′ north, sewer use funds and certain accounting activity contained within the general ledger of the township.

The breakdown regarding areas investigated are as follow:

General Ledger Activity

Working in conjunction with McNamara and Graham, the testing scope for this part of the project was to review a number of transactions in order to determine if the data in the QuickBooks file was adequately recorded in order for the board to place reliance on its content.

Peacock selected 25 transactions from the general ledger over the last decade to check for deviations.

If there was one deviation, then the scope changes to check 40 transactions. If no deviations were found, the test would stop. If another deviation was found, then the scope increases to 60. If a third deviation were to be found, then the test is considered failed.

“The results of our testing yielded no deviations within the initial 25 transactions which were tested,” Peacock stated. “The population of transactions included items such as accounts payable checks, payroll items, bond payments and other miscellaneous transactions identified upon review of the bank accounts and reconciliations.”

Recommendations

Peacock said township officials should maintain records indicating who prepared documentation posted to the general ledger as well as clear indication of who reviewed the documentation along with each signature and should contain dates of preparation and approval prior to being posted into the general ledger.

Peacock also advised the township that no disbursements should occur without approval and review of each transaction as well as comparing to available funds within the budget.

Where budgets are getting close to being exceeded, Peacock wrote, proper budget amendments should be made timely.

Special Assessment

Peacock said that, during the initial assessment of the project, he was required to become familiar with the original ordinance as well as the second ordinance that was approved to supersede the original.

The schedule for collecting funds in order to pay the annual bond issuance and interest was set on May 30, 2003.

“Based upon our analysis and review of the special assessment billings, it was determined that the amounts due under the initial special assessment ordinance were included with the property owners’ property tax bills,” stated Peacock. “The billing of these amounts due with their property taxes and were billed by the county. Collection of these taxes/assessments/fees are assured since the county settles with the township for any delinquent taxes on an annual basis.”
He added, “Understanding that the funds were collected by the county and forwarded to the township once settlement occurs between the township and the county, where the funds were routed to within the general ledger is not readily determinable.”

Peacock’s report says the establishment of a debt service fund was operational during the first few years, then the funds were commingled with other operational funds of the township.

“This particular change in accounting for these funds causes concerns that funds earmarked for bond payments may have been used for other purposes,” Peacock wrote, adding that interest due on the assessments paid over time was not tested during his investigation.

Recommendations

Peacock said the township board should create a debt service fund to account for the funds still being received under the special assessment.

He also advised the township to maintain a record of interest charged on any outstanding assessments to indicate the interest rate charged as well as cumulative interest charged on assessments paid over time.

“Borrowings from other funds to fund bond payments and interest should be stopped immediately, and repayment of any borrowings to date should be made as quickly as possible,” Peacock stated.

Sewer Extension from the Post Office to 450′ North

Peacock wrote that, upon completion of the initial sewer plant, there were owners of additional parcels of property who desired to hook up to the original system.

“We have ascertained that the parcels indicated as paid were collected and the ones unpaid remain unpaid as of the writing of this report,” Peacock stated. “In addition to the collection of these assessments, it is unclear if the funds were accumulated and used to pay outstanding bond obligations, or used for other obligations of the township.”

Recommendations

Peacock’s report says the township should employ all efforts available to collect any amounts due for the additional parcels, including the related interest charged thereon.

Also, service hookup and cutoff records should be maintained so the township can have accurate data for billing and collecting.

Sewer Use Billings

Peacock’s report then discussed sewer fees as part of the sewer ordinances. They are supposed to be billed based on Residential Equivalent Units (REUs).

Peacock stated that the basis for billings was that each sewer user was to receive a bill each quarter based on a formula of REUs times $14—subsequently amended to $24—per month.

“In reviewing the approved ordinance, as well as customary responsibilities between the offices of treasurer and clerk, the responsibility of enforcing the ordinance—billing the special assessment, sewer extension from the post office to 450′ north and sewer use billings—fall under the auspices of the treasurer’s office,” Peacock stated.

According to Peacock, it had been represented during his investigation that the responsibilities of administering the sewer use billings was transferred from the treasurer’s office to the clerk’s office.

“We were unable to ascertain that this responsibility had been transferred when reviewing board resolutions, minutes of meetings or any other official township documents,” stated Peacock. “However, the clerk made representations that certain billing activities were performed by her office. Regardless of who was legally responsible or who may have undertaken certain activities, the sewer use fees appear to not have been billed or, if billed, were not collected in accordance with the … ordinance.”

Finally, Peacock wrote, “[H]ad the treasurer prepared the necessary reporting indicated … in the ordinance by Nov. 1, of each year, this issue would have been caught in sufficient time to make the necessary corrections.”

Peacock’s report says that, once his work was completed during this past summer, it was determined that in excess of $130,730 of sewer use charges had not been billed to, nor collected from, sewer users as of April 1, 2015.

“If these billings had been timely and collected, the funds received by the township would have provided needed cash-flow to pay operating expenses which would have reduced the need for the sewer fund to borrow from other funds of the township,” Peacock stated. “Considering the issues that sewer use fees have gone un-billed/uncollected and/or incorrectly billed, along with the inability to determine if the assessments collected were not expended on other township expenses, the sewer fund did not have the funds to pay operating costs along with the required bond and interest payments.”

According to Peacock, the sewer fund ended up borrowing funds from the general and road funds in the amount of $96,770 and $90,389, respectively, as of March 31, 2015. The total of the sewer use fund as of March 31, 2014 was $90,048, which was due to both general and road funds.

The analysis of un-billed/uncollected accounts receivable started in October of 2004, as this was the date that township management determined to be the most accurate to use for this analysis, Peacock’s report says, adding that it is likely that some customers hooked up prior to this date.

However, data is not available as to hook-up and disconnection per parcel.

The report goes on to show that, in preparing the accounts receivable report, the township’s auditor for year 2014 constructed balances using service codes such as “invoice” and “payment.”

However, Peacock, added, it should not be construed that all of those invoices were actually issued to sewer users.

“While there were periodic payments received from customers which would indicate that some billings had been issued, a vast majority of the billings appeared to not be billed or, if they were billed, had gone uncollected,” Peacock stated.

Recommendations

Peacock advised township officials to put personnel in place that have the responsibility for preparing the invoices each quarter, though it had been decided sometime in 2015 that monthly billings would be prepared, and that collection of the billings are done in a timely manner.

The township should also adopt a collection policy that is enacted by the board to address the collection of delinquent sewer billings. The policy should include the option of placing unpaid balances onto the property tax billings, which would essentially enforce the ordinance already in place.

A reconciliation should be prepared annually which reconciles the annual revenue in the sewer use fund to the required billings based on REUs and rates per REU. This should be completed by someone independent of the billing and collection function.

Peacock’s report says that collection of the billings that had gone un-billed should be addressed with the township board, along with the township attorney, to determine an approach that would yield the highest amount to be collected.

He also suggested that they record the accounts receivable subject to this report into a separate general account in order to maintain data integrity and historical information for future boards.

An allowance can be created for an estimate of un-collectible accounts from the listing.

The amounts borrowed from other funds should be repaid as quickly as possible. And, a formal amortization schedule should be adopted by the board, which would require funds be transferred back to these funds to make them whole.

The road fund should be the first priority when planning for repayment, stated Peacock.

He also said the board should adopt a policy on inter-fund loans and have them documented in a resolution after consultation with the township attorney.

The board should also adopt a policy to properly administer the sewer use ordinance and make sure Article XIV, along with other provisions, is complied with.

Finally, the township should continue with plans to have a rate study on the sewer fund performed to make sure sufficient funds are being received to fund operations, capital replacements and maintenance costs.

Other Matters

Peacock’s report claims that, during his investigation, he was engaged to review the new chart of accounts that was enacted in the second quarter of 2015, to align the township’s chart of accounts to that of the State of Michigan’s uniform chart of accounts. This process required management of the township, along with its audit firm, to essentially recreate the general ledger accounts under the new format.

“We reviewed the new chart of accounts and found them to be in compliance with applicable accounting standards,” Peacock wrote. “Many new funds were created, which segregates funds according to purpose and allows for a more clear presentation of financial data under current accounting standards.”

Recommendations

Peacock stated that, as time goes on, the flexibility of the township’s accounting system should allow for additional funds, new accounts and the removal of old accounts as the township’s needs arise.

“QuickBooks is a very powerful accounting system and can account for many different business types. However, it does not seem to have great success in managing governmental operations,” wrote Peacock. “The township may consider a different system that functions specifically in the governmental accounting environment.”
He added, “While this is not an urgent matter, if using QuickBooks with the new chart of accounts becomes burdensome, there are many different software packages that are worth considering.”

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