photo by: Nick Krug

Lawrence City Hall, 6 E. Sixth St., is pictured on May 3, 2016.

When auditors arrive at City Hall this spring to do their annual review of the city’s books, city officials expect they will find that many of the problems of the past two years have been resolved. Others, though, will take more time.

In the 2018 and 2019 financial audits, the auditing firm RSM had to make enough corrections to the city’s financial records — $63 million and $32 million worth, respectively — that the city was flagged as having a “lack of internal controls over financial reporting,” meaning the city did not have proper procedures and controls to ensure mistakes in its financial statements would be detected. One recurring problem was the city’s inability to reconcile all its cash statements, which is a process similar to how someone would balance a checkbook to ensure personal financial records matched the financial transactions logged by the bank.

Following the review, RSM called on the city to take several corrective actions, and a recent report from the city’s finance office to the City Commission outlines the steps the city has taken since the 2019 audit to address the problems identified. City Manager Craig Owens, who joined city staff in July of 2019, said that staff had been working diligently to address the problems and that the upcoming independent review of the city’s finances would be critical in assessing the city’s progress.

“My assessment of effort and conscientiousness and transparency from the finance department is very high,” Owens said. “So the results (of the audit) are all that may matter, but I really believe everybody is really trying to do everything they can to get ready for the audit and to be prepared for it.”

After the adjustments, auditors gave the city’s financial statements an “unmodified opinion,” or a clean audit, but identified five significant accounting problems that require corrective action, including the adequacy of the city’s internal financial controls and the tracking of its cash assets. City officials say they have made improvements to the city’s processes and procedures to address many of the auditors’ concerns, but that some of the city’s financial tracking issues are a result of shortcomings in its financial management software and will not be fully resolved until the system is replaced.

Keeping track of cash

In 2018, auditors found the city was a full 12 months behind on reconciling cash and investment accounts, or the process akin to balancing a checkbook. Though the city was able to start reconciling its cash about midway through the year in 2019, as part of the 2019 review, auditors had to make an adjustment of about $600,000 to the cash statements in order to get the city’s books to balance. They also said the city’s process for reconciling cash put it at risk of errors and potential fraud.

In both 2018 and 2019, the city’s issues reconciling cash led auditors to label the process a “material weakness,” which is the most severe of the three levels of deficiencies that auditors can assign.

According to the corrective action report, one of the ways city staff is ensuring that all adjustments are made in a timely fashion is through a month-end closing procedure that requires most activity to be recorded within 10 days of the end of the month. The report states that those fixes will help with the overall issue of internal controls and the problems with the reconciliation of cash.

Auditors also found in the 2019 audit that the bank reconciliation software used by the city does not capture all necessary transactions, which was causing issues and requiring city staff to use a workaround that put the city at risk of fraud. As part of the workaround, city staff un-posts certain transactions, removing them from the city’s records, and then reposts them in a way that the software will properly recognize. But this process requires circumventing controls that are meant to segregate duties and help prevent fraud and errors.

Finance Director Jeremy Willmoth, who began his position at the end of 2018, said that the city was able to reconcile cash every month in 2020 and was currently working on the month of December. He said that not being able to reconcile cash for all of 2018 had contributed to other issues, and that now that the city had been reconciling its cash balances each month, the city was more protected from potential errors and fraud.

“When the city wasn’t reconciling cash, then it was sort of like a comedy of errors, because if someone were to un-post a cash journal and you weren’t reconciling cash, you would have no way of knowing,” Willmoth said. “But since we are reconciling cash, if someone un-posts a cash journal and they don’t repost it (as part of the workaround), they’re not going to balance.”

For the time being, though, the workaround will have to remain in place. The report states city staff will have to continue to do the workaround until the city replaces its financial management software, a complicated process that will not be complete until 2022. In the meantime, Willmoth said the city has put mitigating controls in place to ensure abuse is not occurring. He said the city’s IT department has created a process on the back end that will create an external report of deleted entries, which city staff and auditors can then review.

Internal controls

One of the more overarching and significant issues of the past two audits has been the finding that the city lacked internal controls over financial reporting. In both 2018 and 2019, the significant number of adjustments auditors had to make to bring the city’s financial statements into order led the auditors to label the city’s controls a material weakness, a red flag in the finance world.

Apart from cash reconciliation, other issues cited in the 2019 audit included corrections regarding capital asset statements, financial data from LMH Health, and the classification of federal grants spent by the city. An underlying issue that affected the city’s ability to complete its own reviews and make adjustments before auditors arrived was turnover in the city’s finance department. Willmoth said there was turnover in one of the accountant positions around the time of both the 2018 and 2019 audits, but that the finance office is now fully staffed and in a better position to begin the 2020 audit than it was the past two years.

In addition to the month-end closing process, the corrective action report states that city staff has also been working on a comprehensive internal control manual that will be shared with the entire staff when it is finalized. The manual will be a “one-stop shop” that aims to better prepare staff for the various year-end reviews required as part of best practices in accounting.

Though he thinks the city has addressed the internal control problems identified by auditors, at least within the limitations of the city’s current financial system, Willmoth said the true test would come once the auditors had begun their review of the 2020 finances. Willmoth said a key part of improving the city’s financial controls has been improving its processes and policies and communicating those changes to staff.

“I think the staff and finance department has done a really good job of communicating new policies to departments and identifying areas within our current policies that need to be improved,” Willmoth said.

However, both Willmoth and Owens emphasized that until the city could replace its accounting software system and get rid of some of the workarounds and manual processes that the system required, the city’s internal controls would continue to be a weakness identified by auditors. According to the corrective action report, city staff is evaluating proposals from 13 vendors of financial systems and hopes to recommend a vendor to the City Commission this summer. As that system is set up and a conversion takes place, the city will continue to use its current system, likely until at least the middle of 2022, meaning that a finding related to the city’s internal controls likely will persist until at least the 2023 audit.

Owens said it was important to note that despite the accounting issues auditors had identified, there was never any money that the city had lost track of and the city would continue to work to improve its processes. He said he would not be satisfied until auditors consistently found the city’s accounting processes free of issues.

“I’m very satisfied that we’re working as hard as we can to put the very best financial controls in place considering the circumstances, but nobody is going to be satisfied until we get a very good, smooth, clean audit consistently over time,” Owens said.

Willmoth said that city staff was currently working on its part of the 2020 auditing process and that auditors would arrive in April to do their reviews. He said the goal was for that work to be complete before the end of June, so that the audit report could be presented to the City Commission in the middle of July.