Auditors issue "disclaimer of opinion" on 2022 city audit, cite $9 million clearing account

Mayor Brown convened a special meeting on the 2022 audit and heard from the city's external auditors, who said they issued a "disclaimer of opinion" on most of the 2022 financial statements because of unresolved accounting in a single miscellaneous income clearing account.

The lead auditor told the council the audit covers Oct. 2021 through Sept. 2022 and that "essentially all revenues of the city were deposited and are recorded in 1 miscellaneous income account in the general fund." The auditor said "that account had over $9,000,000 in it" when the firm began its work and that auditors "could not identify the remaining half $1,000,000 in that account of revenue that's been recorded," a reconciliation shortfall that prevented the firm from rendering an opinion.

The auditors stressed that a disclaimer of opinion does not necessarily indicate fraud. "We didn't find any instances of anything fraudulent or anything of that nature," the presenter said, but added that the accounting records "were a mess" and that multiple internal-control processes had not been performed during the 2022 period because of turnover in finance staff.

The audit report lists 10 recommendations. According to the auditors, one recommendation addresses the profitability of the sanitation enterprise; the other nine concern standard internal controls such as monthly bank reconciliations, secondary review of journal entries, reviews of payroll and transfers prior to posting.

Despite the disclaimer, auditors said the city's financial condition as of Sept. 2022 appeared healthy in key respects: the general fund had "over $2,000,000 of income," the fund balance was reported at "$2,600,000," which auditors said amounts to roughly five months of operating expenditures, and the utility fund showed about "$1,600,000" in income. The auditors also noted the pension plan had a negative 17% return in 2022, consistent with broader market declines that year.

Vice Mayor Chen thanked the auditing firm Perfect Grama and city staff for "working so hard to untangle the mess," attributed many problems to high turnover among finance directors (named during the meeting as Peter, Carl, Maxine, Danielle and Jaime), and said the city has begun creating dedicated funds and transitioning to a digital accounting system to reduce posting errors.

Council members asked for clarification about who performed finance duties during vacancy periods; the auditors and members said the city manager had covered some responsibilities and that current checks and balances have been restored. The lead auditor described a catch-up plan: begin work on the 2023 audit in October, target issuance in December or January, and return to a normal schedule by performing the 2024 audit in February'024 through April so it can be issued before the statutory June 30 deadline.

The auditor reminded the council that the state has authority to withhold revenues if reports are sufficiently late, and noted the withholding authority typically becomes relevant at roughly one year past due, underscoring the need to meet the new timetable.

Council members praised the incoming finance director Jaime and staff for recent progress. The mayor summarized the council's takeaway as: the city remains in generally good financial condition, the documentation and bookkeeping gaps are being addressed, and the auditor provided 10 recommendations staff will implement.

Mayor Brown closed the meeting with a procedural announcement that there will be no July 1 meeting due to a light agenda and holidays; the council's next meeting was scheduled for July 15. The meeting adjourned after the auditor and council exchanged final thanks.