FRANKFORT, KY - State Auditor Crit Luallen released the annual audit of Louisville Metro government Wednesday, which makes 69 findings with recommendations on the city’s financial reporting and its oversight of federal dollars.
Auditors issued a “qualified” opinion in both areas, meaning they encountered weaknesses in the city’s oversight of financial reporting and federal grants.
The audit found weaknesses in how the city tracks its overall revenue and how the Department of Corrections handles cash management and inmate receipts.
Other findings recommend improvements in the departments of Housing and Family Services, Public Works, Neighborhoods and Animal Services.
The audit, which reviews Louisville’s finances from July 1, 2008 to June 30, 2009, also questions $94,000 in federal disaster and workforce funding.
“Our audit raises several concerns in areas of metro government that need the city’s full attention in order to improve accountability going forward,” Luallen said. “We offer numerous recommendations in the audit as tools for Louisville Metro to strengthen financial oversight.”
Kentucky law requires the state auditor to annually audit Louisville Metro government. The state auditor may grant permission to the city to hire a private CPA firm.
Luallen’s office performed the first three audits of metro government after merger in fiscal years 2003-2005. Strothman and Company of Louisville audited metro government from 2006-2008.
Last year, Luallen audited the city’s housing department for fiscal year 2008, and that audit was included in the city’s overall audit. The housing audit, issued last February, made 43 findings and 58 recommendations to strengthen financial management and controls in the department.
Many of the issues found in last year’s housing audit have been resolved, Luallen said, adding that the city must continue to address all issues in the department until they are corrected.
“Significant progress has been made in housing over the last year,” Luallen said. “The city and the leadership in the department have taken our previous audit seriously and are using our recommendations to continue efforts to strengthen the overall management of the department.”
Auditors reviewed the city’s expenses totaling $698 million for fiscal year 2009 to render an opinion on the financial statements and make recommendations to improve internal controls over financial reporting.
Auditors make 36 findings – four that were deemed material weaknesses that caused auditors to issue a “qualified” opinion on the city’s financial statements because of improper oversight in these areas. A material weakness has the potential to lead to a significant misstatement on financial reports.
One material weakness finding concerns the way the city recognizes revenues, including $23.5 million in accounts receivables that could not be supported.
Auditors also identified approximately $22.6 million in cash collections that were not recorded as revenues when received but were inappropriately deferred to future periods. This amount includes $4.8 million reported in the general fund and $17.8 million reported in the special revenue fund.
The effect of the city’s revenue reporting errors is a departure from generally accepted accounting principles related to deferred revenues, according to the audit.
The other three material weakness findings were in the Metro Department of Corrections, which, according to the audit, “provides the opportunity and incentive for fraud and error to occur.”
The findings include a lack of overall financial management in the department, including its failure to properly reconcile inmate accounts.
Of the other 32 findings relating to the city’s financial statements, auditors found three findings relating to Metro Animal Services. These findings include improving its overall business climate, strengthening internal controls over receipts and improving its inventory procedures.
Auditors found that the agency does not have adequate inventory procedures and operates in “very crowded conditions.”
The audit notes that a full inventory of animals is not performed daily as required by agency policy. For example, the audit notes that in May 2009, there were 134 animals missing from the agency’s reporting system.
In the Metro Department of Neighborhoods, the audit reports 36 invoices from 15 separate vendors appear to be fabricated.
“These 36 invoices were approved for payment, generating checks to the 15 vendors totaling $368,660,” according to the audit. “Because investigations by Metro Internal Audit and Metro Public Integrity are not yet complete, there is a potential that other invoices have been handled in this manner and not yet detected.”
Auditors also found payments made to a business co-owned by a department employee and note that this action indicates an extremely high risk of “unethical business practices” in the department, according to the audit.
The financial review also found that metro purchasing should identify required elements for all metro contracts, including a right-to-audit clause and the metro government should ensure employee benefits are consistently applied in accordance with established policies and procedures.
Auditors reviewed the city’s oversight of $89.5 million in federal expenditures to ensure proper internal controls and compliance with federal guidelines.
In this area, auditors make 33 findings – eight that were deemed significant material weaknesses that caused auditors to issue a “qualified” opinion on the city’s oversight of federal dollars. Five findings were in Metro Housing and Family Services and three in Metro Public Works.
In housing, the audit recommends the department continue its corrective action to improve fiscal management, along with submitting accurate performance reports on federal awards; ensuring employees are aware of conflicts of interest policies; ensuring only allowable costs are included in federal reimbursements and continuing to strengthen controls over its Shelter Plus Care program.
In public works, the audit recommends the agency improve its fiscal management of FEMA disaster grants; ensure invoices are paid in accordance with contractual agreements and ensure grant charges are accurately reflected in the city’s accounting system.
During their review of FEMA grants, auditors obtained correspondence from Kentucky Emergency Management (KyEM) that identified $5.3 million in disallowed costs to the city involving debris removal, administration costs and an ineligible project worksheet. The city is currently in an appeal process to determine the amount for which the city may not be reimbursed.
“Metro Public Works lacked adequate internal controls in determining necessary and reasonable costs associated with its federal grant funding,” according to the audit. “The numerous significant weaknesses noted throughout the audit and the results of the KyEM review indicate the government’s difficulty in responding to rapidly changing circumstances, as is common with the types of disasters that trigger public assistance grants funding.”
Auditors also question $94,666 in federal funds from the US Department of Homeland Security/FEMA and US Department of Labor/Workforce Investment. The questioned costs include:
• $74,111 due to rate of debris removal being $25 per ton higher than the contracted rate. This results in questioned costs that represent the 75 percent federal share portion of the invoices.
• $4,010 due to debris being cleared at locations not specified in the bid. The cost is 75 percent of the federal share.
• $6,000 of a federal grant used for cleaning services in a building where two grant programs are housed. Auditors are questioning the portion of the cleaning costs attributable to another grant program.
• $4,012 due to improper state road reduction rate by Metro Public Works on a road project worksheet.
• $957 due to a lack of adequate supporting documentation for a federal disaster grant.
• $5,576 for the cost of a storm siren that was note not noted on the project worksheet.
Read the complete audit: Full Louisville Metro Audit (PDF)