South Tucson’s lengthy delay in preparing its end-of-year financial statements made it vulnerable to a suspension of federal aid, a major source of the square-mile city’s revenues, its fiscal year 2013 audit shows.
The statements weren’t finished until more than 11 months after the close of the fiscal year, which ended June 30, 2013.
The city publicly released the audit Tuesday after repeatedly refusing to disclose draft versions. The federal deadline was March 31, 2014. The deadline for submission to the state was Dec. 31, 2013 — the day after the city signed a contract with a new auditor, Fester & Chapman.
City Manager Luis Gonzales, hired in June 2013, wanted to hire a new auditor to get a fresh review of the city’s finances, and it took time to advertise for and receive bids, he said. The departure of former Finance Director Ruben Villa in September also contributed to the delay, he said.
The potential consequences of failing to meet federal reporting guidelines are withholding, suspending or ending grant payments, according to federal rules. But Gonzales said he had no talks with federal agencies seeking to cut off funding.
The auditing firm raised another potential outcome associated with delays: “Untimely financial information has the result of preventing those charged with governance from making informed financial decisions.”
The city has been making decisions related to the audit findings, but Gonzales said that’s because several of the findings are repeats of previous years’ findings.
“Prior to this new administration, something was just not being done,” he said. “Some of these changes started even before the audit began because I had seen the prior audits.”
Former Finance Supervisor Sylvia Salomon was charged with theft in May as the financial review process revealed inadequate controls on credit-card payments and cash receipts, as well as delays in cash deposits and account reconciliation. Gonzales announced related policy changes around that time.
Through this year’s budget process in June, the city also eliminated a secondary property tax that had been put in place without voter approval in apparent violation of state rules.
The audit reported 14 material weaknesses in financial controls that largely related to management of the city’s general fund — about $4.5 million in fiscal year 2013 that covered most of city’s core services, including public safety.
Material weaknesses are deficiencies leading to a reasonable possibility that the city won’t prevent, detect or correct a significant misstatement of its finances promptly.
Among the findings:
- South Tucson’s secondary property tax appears to be illegal because voters never approved it. Auditors’ research concluded there is no provision for restitution in Arizona law, and the city does not accept liability. The Legislature, auditors note, is likely to take up the issue next session.
- More than $154,000 in cash piled up over seven months in a city safe because employees did not follow a policy requiring daily bank deposits.
- Finance Department employees had access to the general ledger and presigned checks without oversight. Auditors recommended new policies that separate the duties of approving invoices for payment, keeping track of checks and recording transactions among various employees.
- The city also failed to reconcile its accounts monthly, have another employee review the reconciliations or count the cash on hand at the end of the year. The June 2013 bank reconciliation was not completed until January 2014 and was missing documentation. Additionally, “significant outstanding items were not investigated.”
- The beginning balances for several funds did not agree with the prior year’s audited financial statements because of accounting deficiencies. Auditors proposed and the city accepted adjustments to the previous year’s statements.
- The city failed to promptly bill other governments for $226,000 in services. It also failed to estimate uncollectible bills, resulting in an overstatement of its general fund by more than $300,000.
- The city did not calculate depreciation on its buildings and other capital assets from 2003 through 2011, leading to total assets being overstated by $1.15 million. It had also not done a physical inventory in three years, and the capital assets listing was incomplete.
- A test of credit-card transactions found that 12 out of 14 charges had no receipts, approval by someone other than the purchaser or stated business purpose.
- A preliminary report of federal spending was inaccurate.
- More than $238,000 in cash held by the Pima County Attorney’s Office was unreported in past financial statements.
- Volunteer firefighters’ pension payroll deductions and the city’s matching contributions were deposited into the pension fund 10 months after the fiscal year closed, rather than every month as required by state law.
Gonzales said he has paid special attention to fixing cash controls. Duties are now spread among departments, and cash must be deposited within 48 hours, he said.
Calls to Salomon’s attorney, Ramiro Flores, and former Finance Director Villa were not returned Wednesday.