Editor’s note: This commentary is by Randy Brock, a former Vermont state auditor and state senator who was the 2012 Republican candidate for governor. He heads Rockledge Risk Advisors LLC.
Town Meeting Day is upon us. Aside from ballot issues about dump truck purchases and small contributions to worthy charities, voters will also be presented with the job of examining their municipality’s financial statements.
These financial statements are critical tools for voters to truly understand how local governments are using or misusing taxpayer money. But increasingly, some cities and towns are playing sleight of hand to avoid showing all of the cards to their citizens.
Recent Vermont history is littered with audits that warned of serious financial problems about which municipal officials either were unaware of or ignored until disaster occurred. Burlington Telecom was the most recent example, but issues have arisen in past years in Rutland, Bellows Falls, Brattleboro and other towns. The common denominator in these cases has been that city councils and selectboards either were unaware of or had failed to address, sometimes for years, serious financial threats reported by their auditors.
Auditors are required to include in their reports information about weaknesses in internal control, instances of fraud, compliance failures or fiscal abuse. These problems, as well as recommendations for improvement, are detailed in the auditor’s so-called “management letter.”
But management letters are of no value if local elected officials and the public are not informed of what’s in them.
To address this problem, in 2010, I introduced in the Vermont Senate S.187, which I sometimes jokingly referred to as the Burlington Telecom Anti-Deniability Act of 2010. It was designed to prevent municipal officials from hiding management letters in the bottom drawer. This bill, which was enacted into law as Act 95 of 2010, required municipalities to do several things:
• Perform audits under government auditing standards, a more rigorous standard that not every town had been using.
• Require that the management letter, which includes a report on internal control over financial reporting and a report on compliance with laws, regulations contracts and grants, be released to the public. The management letter is where you’ll see the juicy details of what, if anything, has gone wrong, what serious issues haven’t been addressed and where town officials’ past year promises to fix problems haven’t been kept. It’s where you’ll also read about potential areas where fraud and error have happened or are likely to.
• Require that the public be made aware of the existence of material weaknesses and significant deficiencies, and that the details be included in annual reports.
• Require auditors to appear before city councils and selectboards to explain material weaknesses and significant deficiencies, so that never again can such a body say “we didn’t know.”
Unfortunately, today, four years after this legislation was enacted, some Vermont municipalities continue to ignore these requirements.
Read the footnotes. The footnotes, which are at the back of the audit, behind the pages and pages of numbers, will tell you a lot about what’s actually going on. They explain what’s in the numbers and why.
So here are a few tips on how to spot red flags in municipal audits and how to hold city and town officials accountable.
• Beware if the audit printed in the town’s annual report is not current. Most Vermont municipalities end their fiscal year on June 30. There is ample time for audits to be completed and to be available for town meeting. Some towns use a Dec. 31 year end. In these cases, as a minimum, officials should be able to present the results of the prior year’s audit. If the audit report is not part of the annual report, ask for a copy.
• Demand to see the auditor’s management letter. Beware if you are told the audit is complete, but the management letter is still being written. One trick municipalities are using is to claim that the management letter won’t be ready until after Town Meeting Day. What they usually mean is that the town’s response to the auditors’ findings hasn’t been written. But that’s no excuse not to release the findings. Look at management letters for two important phrases: “Material weakness,” which means “really bad,” and “significant deficiency,” which just means “bad.” Demand that municipal officials explain each of these findings, if for no other reason, to make sure they understand them.
• Beware if there is no audit at all. Worry if your town is not audited by an independent public accountant. Some smaller towns still use town auditors, who do their best to keep track of the numbers. But in today’s world of complexity in municipal finance, in which most Vermont towns are now multimillion dollar enterprises, virtually every municipality except the very tiniest ought to have an annual independent audit. Otherwise, as we have seen in places like Ira and Isle la Motte, undetected fraud or error could cost taxpayers big time in the future.
• Beware of summarized financial results. Some towns choose simply to summarize financial data in annual reports. These summaries do not always fairly reflect what is in the actual audited numbers. Ask for the complete audit and especially the management letter.
• Read the footnotes. The footnotes, which are at the back of the audit, behind the pages and pages of numbers, will tell you a lot about what’s actually going on. They explain what’s in the numbers and why.
• Beware of the words “qualified,” “disclaimed” or “adverse.” Each of these words has a specific definition, and none of them is good. If you see these words, demand an explanation because it means your town does not have a “clean” audit opinion.
Financial audits are sometimes difficult to read, often filled with impenetrable auditor jargon and sometime boring beyond belief, but having accurate financial statements is critical to ensuring that tax dollars are being spent properly and that municipal resources are not exposed to serious risk. Why pay thousands of dollars annually for audit reports and management letters that are unavailable when it counts the most – when you are voting on money issues and for the people who will manage that money in the year to come?
