Accounting Personnel and Systems
The need for accurate and timely financial information is a
critical need long recognized in the commercial sector. Yet, in many instances,
the need for this same financial information in the governmental sector is not
given the priority it deserves. In this case, Ecorse was no exception.
Despite representing one of the more critical
administrative deficiencies existing at Ecorse in the early to mid-1980s, there
was no mention of the matter in the Financial Recovery Plan. In addition, the
outside auditors did not provide sufficient discussion in their reports covering
internal accounting and administrative controls to enable City Council, grantors
and the State Department of Treasury to fully understand the depth of the
accounting record deficiencies. Essentially, the financial records were in
shambles and no internal actions were taken to correct the problem.
At the time of the receivership, the City Controller had no
formal training in accounting and relied heavily on the outside auditors to
fulfill the role of both accountants and auditors. The use of outside auditors
was costly both in additional fees and limiting Ecorse management's ability to
identify operating issues and budget short-falls as they arose.
Routine accounting tasks are the responsibility of a
properly functioning accounting department. Examples of these tasks, which were
performed by the outside auditors and billed as an incremental cost, follow:
Reconciliation of the then 35 bank accounts (several of
which were not recorded on the general ledger), interfund transactions, and
other account detail to the general ledger control accounts.
Cash receipts were generally recorded in one of three
funds (General, Current Tax Collection, or Water and Sewer Funds) during the
year by Ecorse personnel. After year end, these transactions would be analyzed
by outside auditors and distributed to their appropriate funds and accounts.
This process involved a substantial amount of duplicative effort.
Preparation of analyses of general ledger accounts,
including: accounts payable, property taxes, accounts receivable and others.
Preparation of several hundred adjusting entries to close
the accounting records after year end.
Preparation of Ecorse's financial statements.
To identify a sense of the costs associated with the
accounting assistance in routine management tasks provided by the outside
auditors, an article in the local newspaper in fiscal 1986 indicated the
following comparisons of fees paid to outside auditors among many downriver
communities for the 1985 fiscal year:
The newspaper article did not specifically cite the actual
costs paid to Ecorse's outside auditors. Rather, it referenced that the fees
exceeded $90,000. It is likely that this amount excludes the Water and Sewer
Fund and Building Authority Fund fees which were normally billed separately. In
1986, these separately billed fees were $35,000 and $7,500, respectively.
A review of the auditor's workpapers engaged for the 1986
audit of Ecorse's financial statements and accounting assistance reflected total
hours incurred of approximately 3,800 and total fees of over $148,500.
In addition to the substantial "audit" fees above, Ecorse's
audited financial statements were often issued six months or more after year
end. By the time that Ecorse management, including Council, was informed that
they had a deficit for the prior year, Ecorse was a full six months or more into
the next fiscal year.
Thus, the ability to mitigate the accumulating deficits
was, in part, attributed to the inability of the Accounting Department to
account for Ecorse's operations on a timely basis.
The lack of an on-site skilled accountant created a void in
the ability to analyze routine and critical financial transactions. One of the
most critical events surrounding a governmental unit is the need for a proper
analysis of potential labor alternatives during the negotiation of contracts.
Failure to properly identify the financial status and impact of proposals on
Ecorse's operations also contributed to the fiscal distress.
In addition to the need to properly analyze labor proposals
during negotiations, poor accounting practices can and did manifest themselves
in various losses, including:
Grant disallowances – Ecorse failed to properly
bid certain contracts in 1985 which resulted in disallowed costs paid back to
the grantor of $13,062. At the inception of the receivership, over $19,000 of
unsubstantiated costs were also not billable to the grantor and were charged to
the General Fund. Other failures to comply with grant provisions resulted in the
withholding of grants until such time as Ecorse was able to demonstrate
compliance to the grantor.
Cash flow analysis – The number of bank accounts,
failure to properly record all cash transactions and reliance on outside
auditors in the performance of bank reconciliations resulted in the inability to
accurately project cash flow needs and maximize investment opportunities.
Bank reconciliations – At the inception of the
receivership, there were unlocated differences of almost $8,000 in the general
bank account and almost $19,000 in the payroll accounts. Fortunately, the bank
balances exceeded the recorded book balances and these differences resulted in
Improper use of restricted assets – The Major and
Local Streets Funds' cash was used to fund the operations of the General Fund.
In addition, Water and Sewer Fund cash was also used. Ultimately, the General
Fund was required to return these borrowed funds. While no loss of principal
resulted, the Major and Local Streets Funds were unable to accomplish their
primary objective of street maintenance. The Water and Sewer Fund deferred
repairs and maintenance and similar efforts. Finally, none of these Funds
received the investment income on the otherwise idle cash they would have had to
Budget – Throughout the early 1980s, Ecorse's
Council passed balanced budgets for its General Fund, but failed to adjust its
actual operations to reflect the level of funding. It is presently difficult to
determine what actions would have been taken by the Mayor and Council had proper
financial information been presented for action. However, the annual financial
statements, once received, clearly demonstrated over-expenditures against the
budget. The Mayor and Council were not given the opportunity to take action on
budget over-runs as timely budget to actual comparisons were not prepared on an
Sick and vacation Day obligations – The sick and
vacation pay obligation, which was $1,367,420 at June 30, 1986, was based upon
various departmentally maintained manual accounting records. The accuracy of
these records, which were used as a basis for the final payouts upon employee
termination, was suspect.
26th District Court
The 26th District Court cash receipts and disbursements
were not recorded in Ecorse's computerized general ledger. Rather, a manual cash
receipts and disbursements journal was maintained. Often, fines were paid in
cash as many residents and others did not have personal checking accounts.
Examples of accounting system deficiencies follow:
There was no listing of amounts owing to individuals who
had posted cash bonds. As a result, it was difficult, if not impossible, to
determine whether the separate bank account maintained for these transactions
had the appropriate amount of cash. In addition, the return of cash held may not
have been the same as the amounts posted as bail.
The condition of the manual records inhibited the
preparation of bank reconciliations. The bank reconciliations were generally
prepared by the outside auditors on an annual basis several months after year
There was no attempt to identify parking and moving
violation ticket numbers to ensure that all cash receipts were deposited and
those tickets not paid properly pursued.
Deposits were not made intact, nor on a timely basis.
No efforts were expended in attempting to provide
appropriate segregation of duties to ensure that errors and / or irregularities
would be detected by management.
Distributions for fines collected were not made to the
State or Ecorse for months after collection, despite Ecorse's cash flow
Finally, many of the positions involving accounting and
related activities were filled with relatives. At the time of the receivership,
the following examples are cited:
Treasurer's Office – The Treasurer was the son of the
Deputy Treasurer. In addition, the Cashier was the sister to the Treasurer.
Accounting Department – Included within the four person
Department were a mother and daughter.
Assessor's Office – The Assessor was the son of the
Deputy Assessor (mother).
Generally, these functions are incompatible in an internal
control system and should not be filled with relatives as the ability to detect
errors and / or irregularities is diminished, if not totally eliminated. Other
examples of nepotism existed in Ecorse, however, it did not involve accounting