Perfect storm of issues leads to common audit finding

A three-year financial audit by the Washington State Auditors Office found that the City of Medical Lake has had issues keeping track of its internal finances.

But don’t be alarmed, Kathleen Cooper, director of communications for the state auditor said.

“It’s not an usual finding,” Cooper said. “Internal controls are the most common finding. They don’t have enough internal staff to do (the accounting) so they hire someone.”

The audit found the city incorrectly classified $507,023 as unreserved rather than reserved money in its general fund, understated $56,372 in cash and investments, and $70,847 in expenditures in 2015, according to the audit report.

Findings were similar for 2016 and 2017 as well.

“These are not insignificant errors,” Cooper said. “Not that there isn’t a problem, but there isn’t any missing money.”

The problem is oversight, and it’s not an uncommon one. Smaller cities like Medical Lake, school districts, and even some counties must compete with the private sector — which typically pays more — to hire financial professionals, according to Cooper.

“It’s a specialized body of work,” she said, noting that Washington state has its own unique accounting standards that must be met by government agencies.

As a result, smaller government organizations like Medical Lake lack the specialized accounting knowledge required to produce financial reports, so they often outsource these heavy accounting tasks to private firms.

But cities also need to know and understand what they’re getting back, and therein lies the audit’s primary finding.

According to the report, the city did not “adequately review the financial statements, notes, and supplemental schedules of the annual financial report to ensure they were complete and accurate.”

“Internal control problems can be traced back to staffing shortages, staffing turnovers and staffing vacancies,” Cooper said. “Staffing is the number one problem that local governments have when it comes to this kind of stuff.”

It was a bit of a perfect storm, according to City Administrator Doug Ross. The city’s previous finance director left in 2016 at about the same time the city switched accounting systems.

“That’s where a lot of the oversight finding came in,” Ross said of the audit. “We had an outside firm doing (financial reporting) so if they had numbers wrong, or didn’t have all the numbers, we didn’t necessarily know.”

He noted that he got a crash course in finance, along with Karen Langford, the city’s current finance director who replaced the previous director.

Langford certainly had her hands full when she replaced her counterpart. Promoted from clerk to finance director, not only did she need to learn the new accounting system, but the old one as well for carry-over purposes. Both were new to her.

“It was kind of rough for sure,” she said. “But between Doug and I we got a lot of stuff figured out.”

The audit recommended the city complete monthly ledger reconciliations, which Langford said the city is doing, and make sure staff is properly trained to review financial statements to ensure the those from outside accountants meet necessary reporting standards.

The auditor’s office isn’t unfamiliar with government fraud, Cooper said, and has internal fraud investigators who take an audit to the next level if front-line auditors feel there is a need or potential malfeasance.

If fraud is uncovered, investigators typically refer to county prosecutors to file charges. In some situations the case may be referred to the state attorney general’s office, Cooper said.

Medical Lake is on a two-year audit cycle; its next audit is scheduled for 2020, according to Cooper.

The entire audit can be viewed on the state auditor’s website at http://www.sao.wa.gov. Under Reports & Data click on Audit Reports. Type in Medical Lake in the By Government Name cell and click Search Audit Reports.

Lee Hughes can be reached at [email protected].