City looks at ‘fraud check’ options

Rebecca Neipp

News Review Staff Writer

City looks at ‘fraud check’ optionsDespite an overall positive audit of city finances, the findings of which were presented to the Ridgecrest City Council at Wednesday night’s meeting, the council voted to contract for “fraud check” services to further protect itself.

Ken Pun, managing partner of the Pun Group, presented a Comprehensive Annual Financial Report for Fiscal Year 2017, summarizing for the council, staff and public the 200-page report.

Pun noted that the city has had the report since December, so “hopefully you’ve had enough time to look at it.”

He noted that the city is responsible for its own financial statements, ensuring that they are presented in accordance with generally accepted accounting principles. The city is also expected to adopt sound policies, establish and maintain internal controls, provide evidence supporting the disclosures in its statements and the prevention and detection of fraud.

The auditor is responsible for performing his audit in conformity with standards, communicating his findings to those charged with governance, assessing risk of internal controls, determining fairness of presentation and rendering opinions. (The full CAFR is available for review at https://ridgecrest-ca.gov/council-agendas, under the link for March 6 Council Agenda.)

After reviewing the city’s assets, liabilities, revenues and expenditures, Pun said that his firm found that the city met its accounting obligations.

In addition, he said, he found no significant deficiencies or material weaknesses in internal controls over reporting and compliance, no accounting issues and no inappropriate activities.

There were a few items that drew questions from the council, including the portion that noted that successor agency (the structure that was implemented after redevelopment agencies were dissolved in California) spending was at 131 percent of income levels.

“Is this common or uncommon for cities in California?” asked Councilwoman Lindsey Stephens.

“It’s pretty uncommon,” said Pun. He said that cities like San Bernardino and Stockton had numbers in the high 120s just before they filed for bankruptcy.

“It’s pretty alarming.” He said the city needs to look at its cost structure and either reduce its spending or increase its revenue to pay for services.

City Manager Ron Strand said that the figures from the successor agency change dramatically from year to year. The city had millions from Tax Allocation Bonds sold more than 10 years ago. Although new revenue is no longer coming in, the city is still spending the remains of that fund.

“So if we don’t have expenditures next year, that rate should change significantly, correct?”

Pun agreed that was true.

The council also asked if the employee pension liabilities would change in next year’s report, since the city refinanced that debt a few months ago.

Pun said that those numbers could change, but he also noted that the city’s actions to manage pensions was a gamble — trading a debt-service fee in hopes that the interest on that loan would be outperformed by a potentially higher rate of interest.

When councilmembers questioned Pun on the “no significant deficiency” finding, Pun noted that his objective is not to find fraud, but to determine fairness in the presentation of city financial statements.

“But we do consider fraud as a factor in risk assessment,” he said. According to Pun, a fairly new tool for municipal auditors is a fraud check-up, which allows a forensic examination and analysis. Costs of the service begin about $10,000 to $15,000 for a high-level review and can run as high as $75,000 for a more in-depth review.

Councilmember Wallace Martin said that he understood that service was incorporated into the routine audit.

“I don’t have heavy numerical accounting in my background,” he said, adding that he believed 80 percent of the presentation went over the heads of anyone who lacked a background in financial management.

“For me, personally, that $15,000 would be well spent.”

Stephens asked if the city could opt for the high-level fraud check, then follow-up with a more in-depth examination if any flags were raised.

“Yes, that’s a decision the city management and council should make after Phase I,” said Pun.

“I recommend we put that on our schedule — at least periodically,” said Strand. “Even having audit controls in place can prevent fraud if people know we are digging a little bit deeper.”

Story First Published: 2019-03-08