With Deputy State Auditor
(from Maine Townsman, January 1999)
EDITORS NOTE: The following transcript is from an interview conducted by TOWNSMAN Editor Michael Starn with Richard Foote, Deputy State Auditor. Having held his position with the State Department of Audit for over 10 years, Mr. Foote has over 25 years of experience in auditing and financial management, and is a certified public accountant (CPA). Among his other duties as Deputy State Auditor, he is in charge of the Departments "municipal outreach program".
What is the reason for the Department of Audits current interest and involvement in educating local government officials about the protection of public funds and the need for better internal controls?
In the early 1900s, the Department of Audit got involved in municipal auditing, which by happenstance resulted from an accounting irregularity in a town. At a latter date, the Legislature provided some funding for the Department to become more directly involved in establishing accounting systems and performing municipal audits. Today, we conduct audits on a fee-for-service basis for approximately 25 governmental entities, of which approximately 10 are municipal audits. Within the past year, weve taken on a much more active role in the leadership and oversight activities with regard to municipal auditing and accounting.
This increased interest and involvement was prompted by a bill introduced by Representative Ahearne of Madawaska during this past legislative session. That bill, which was ultimately withdrawn, would have directed the Department of Audit to become much more involved in providing a broader array of municipal auditing services in the area of cash management and controls. As a result of the hearings and testimony on this bill, State Auditor Gail Chase was asked to work with Maine Municipal Association and other interested parties to provide training materials and programs that would strengthen municipalities internal control systems, and specifically the area of excise tax controls. Gail has asked me to coordinate, develop and implement this program which we refer to as the "municipal outreach program".
Other than the Ahearne bill, what roles has the Legislature conferred upon the Department to assist communities with their financial management practices?
There are sections of law that indicate that we have an oversight role in local financial management activity. For example, if citizens of a municipality believe that the annual audit was not properly conducted, then they can request a petition audit or "second opinion" from the Department of Audit. These petition audits are very rare I believe we have conducted only two of them in the last 10 years. There is a very specific process that must be used to request a petition audit and the municipality is required to pay for the cost of the auditing services.
Also under state law, all municipal audit reports are required to be sent to the Department of Audit. These reports are periodically reviewed, on a random selection basis, to determine whether they meet governmental financial reporting standards. If the report is significantly deficient, then the work of the auditor comes into question. The Department has on a few occasions submitted complaints in regards to the work of an auditor to the Maine Board of Accountancy, the organization that has regulatory authority over the practice of public accounting in the state.
Finally, the Department also receives reports of fraud or suspected fraud. By law, municipal officials are required to report evidence of fraud to the Office of the Attorney General and Department of Audit. While we do not conduct the fraud investigations, we communicate this information to the Attorney Generals Office. The law ensures that there is communication between our two organizations so that a potential problem will not be overlooked.
Do you work closely with the AGs Office when there are reports of missing funds?
We have a very good working relationship with the AGs investigative division. But again, our Department does not get involved in fraud investigations with their office. The Investigative Division of the Office of Attorney General performs or consults with other law enforcement agencies with regard to investigations of missing funds. We perform audits for the purpose of rendering a professional opinion that the financial statements are "presented fairly" in all material respects in conformity with generally accepted accounting principles. If we find indications of fraud during the course of our work we would perform additional work. We would also contact the Attorney Generals Office for their assistance and discuss with them which law enforcement agency we should work with.
Last spring, I did have an opportunity to work with Richard Fairfield, an investigator with the Attorney Generals Office in a program sponsored by MMAs Risk Management Services called "Lessons Learned: Employee Theft in Municipalities". This program examined cases of excise tax fraud, the causes, the investigation, and how to prevent this from occurring in the future. My role in the session was to give some pointers, "red flags" I call them, on how to spot internal control weaknesses.
How does the program on "Lessons Learned" relate to the new program that is being developed by the Department of Audit, MMA and others?
The program on "Lessons Learned" was very well received. It really made an impression on the municipal officials and how important their oversight is to a community. In several of the evaluations on the seminars, there was the suggestion that we needed more time for the program.
As a result, a new training program will be conducted in six different locations (see sidebar). This program will be presented in a "hands on" workshop format. These workshops will be facilitated by members of the CPA community and the Maine Government Finance Officers Association. Attendance at a session will be limited to 25 and there will be a training facilitator for each group of five participants. Due to the limits on attendance, we decided to offer the program twice in each location, on consecutive days. Each program run from 4:00 p.m. to 8:30 p.m.
Were going to have handouts that municipal officials and employees will use in the workshop. We will make every effort to have people that work together as a group be affiliated with governmental entities of the same size. And finally, and perhaps most important, this unique program requires joint registration of an oversight official (i.e., selectman, council member) and a person who is performing many of the day-to-day activities relating to the collection of revenues, accounting for the transactions, etc. (i.e., treasurer, tax collector, clerk). This allows everyone to work together to develop policies and procedures that will strengthen the internal control environment for their organization.
Dick, why is this program so important to the municipalities?
First, it is important that citizens feel that the people who work for the town as well as those who perform oversight activities are working together to make their municipal operations the very best they can be. Thats why we have called this program "Partners for Public Accountability". In this training session we are focusing primarily on cash control policies and procedures. The group that is working on developing this program also indicates the wide range of support for this initiative. Specifically, we have representatives from MMA, Maine Government Finance Officers Association, Maine Tax Collectors and Treasurers Association, and the CPA community. We have also had a great deal of support for this training and input from the Office of the Attorney General and the Secretary of States Office, Bureau of Motor Vehicles. Before the workshops are offered we expect to have other organizations as program sponsors. When we go to press with our workshop brochure, municipal officials and employees will see the types of organizations and the commitment behind this effort. Its not just one organization saying "maybe we should do something". Everybodys on board. I think that speaks loudly about the importance of this program and will help make it a great success. As more than one person has said to me recently, "I think this program has been needed for some time."
Theres no way that these programs are going to reach everyone that needs help. Whats down the road in this effort to educate local officials about internal controls?
At some point in time, we may have to take a more targeted approach. I would say that it would be in the form of internal auditing activity. For example, I established a shared internal function for a group of seven independent mutual savings banks in Maine. My primary responsibility was to evaluate control systems weaknesses and provide recommendations on how to address them. In this case, I was independent of each of the banks and was able to go to the area of greatest need. This type of program could be implemented through MMA.
Another possibility is to encourage the municipalities to contract with their external auditors to perform additional auditing services, beyond those required for the financial statement audit, in areas where they have concerns. I believe this approach is growing rapidly in other industries throughout the country and could easily be applied to municipalities.
The program on "Lessons Learned," having a booth at the MMA annual convention, developing programs such as the one being offered this year throughout the state, your Townsman article last January on "Protecting Public Funds," this interview . . . these are all things that have happened in the last 12 months. I am very optimistic that we will make significant progress in educating local officials about internal controls in the next year or so. At the same time, we will have to evaluate the results of our efforts, and decide what to do next. The keys to this are the development of positive attitudes toward changes in the internal control environment and to have the policies and procedures developed and implemented at the local level.
Is there a way of measuring our success in dealing with this important issue?
There are two ways of looking at how to measure success. One would be to say that if we implement new controls we may find more incidences of fraud. I certainly hope that this is not the case because I would like to think there are no more problems out there. However, if there are, this could conceivably happen. The other way of looking at it, which is much more positive, is that the new control procedures may prevent future situations from occurring. I would really like to see this outcome, and Im sure everyone else would too.
Our objective, that hopefully is shared by everyone, is to establish better control systems for all municipalities. We can measure that through contact with the communities directly and through communications with our CPA community. Ultimately, we would like to see more written policies and procedures for internal controls, increased oversight activities on the part of elected officials, and more training in this area. If these things happen in greater frequency, then we can say that we are successful. Also, with more training and everyone working together, we should be able to reduce the number of future problems.
Lets talk a little more about the potential for fraud, theft or embezzlement in Maine municipalities. This is a serious problem that we are dealing with, isnt it?
Public accountability and the publics trust are extremely important. Therefore, anything that impacts negatively in these areas is very serious. We have had several well-publicized incidents recently that had to do with the embezzlement of public funds. One incident is too many, one in a hundred years is too many. Several in a few years cannot in any way be accepted. I believe thats why Representative Ahearne introduced the legislation in this area last year. I dont want to overstate the seriousness of the problem, but on the other hand, there would not be such a commitment of time and resources on everyones part if it werent a real concern. We must address this issue in a very proactive way and thats what we are all doing.
It seems as though selectmen are much more active in scrutinizing the disbursement warrant (expenditures) than they are in providing oversight of revenues. Why is this?
It may have to do with the fact that the state laws specifically address this area. I agree that they have done a relatively good job on the expenditure area. Perhaps they are less clear about their role in overseeing revenue collection.
Also, fraud detection on the revenue side can be difficult. An employee writing out a check to himself or herself is easy to spot on a disbursement warrant. However, uncovering a cash shortage where the receipt, if there was one, has been destroyed requires more diligence on the part of the oversight official.
When looking at the disbursement warrant, you can see the necessary documentation that supports the transaction. For many communities, cash coming in may not have supporting documentation (receipts). We need to raise the control awareness on the revenue side. Also, municipal officials, if they are not already doing so, need to use "analytical review" procedures. For example, if excise taxes have gone down significantly from the amount collected in the prior year that would be unusual. You then have to ask the question, Why?
Should you have a receipt for checks?
You need a receipt for all transactions. Thats one of the procedures that we must insist on. It doesnt matter whether you receive payment in cash or checks.
Some bills, such as the property tax bill, may have a receipt that is attached to the document. In that case, as long as the receipt was returned to the town with payment, then an additional receipt would not be necessary.
Historically, property taxes are not where weve seen problems. Generally, theres a good tracking system in place in most municipalities as well as segregation of duties in this area. The assessor, selectmen, tax collector and treasurer all have different roles in working with property taxes. The more people you have involved in handling different phases of a transaction, the stronger the control system. Also, if youre delinquent in paying your property taxes, you get your name listed in the town report. This certainly can be viewed as a control.
Excise taxes dont work the same way. Municipal officials have to estimate the amount of excise tax due to the community and that can change significantly from one year to the next. For some communities, the only documentation they use for excise tax collection is a copy of the state motor vehicle registration form. This really isnt good enough. Every transaction should have a receipt, something that you can keep as a separate record that supports the deposits for that days activity. Receipts need to be numerically sequenced and the policy of receipting needs to be strictly adhered to. If receipts are missing, there needs to be a good explanation as to why.
As you noted earlier, local excise tax collection seems to be the most vulnerable to fraud and theft. It is the area where your outreach program has concentrated efforts. Elaborate on this problem and discuss the Department of Audits relationship with the Bureau of Motor Vehicles.
This is one of the key areas in our program that we will address, and it is as you said, because history has proven it to be a very vulnerable area to theft. In the cases where there has been excise tax fraud, there has been a lack of documentation. There needs to be more control over the preprinted registration forms and blank forms (excise tax forms) as well as cash receipts used for all transactions. The concept that should be used is that of inventory control. In this case our inventory is excise tax forms which are pre-numbered. Your municipality needs to have a system that quickly determines whether a form has been used, is waiting to be used or has been voided. If you cannot find the form it may have been intentionally destroyed and the money, which is very often in cash, taken. The other use of these forms is to determine that the excise tax forms that have been used have a corresponding deposit slip that supports the money deposited into the bank. Either way you look at it, documentation (the excise tax form and cash receipt form) is what you need to review the effectiveness of the control system. If you dont know where the documents went, you probably wont know where the money went.
Another way of thinking about inventory over documents is control over checks in your checking account. Im sure you want to know whether the checks have cleared the bank, are outstanding and havent been cashed, have been voided or are still in your checkbook. If the checks arent in one of these places, someone may be using them in an unauthorized manner.
We have worked very closely with the Bureau of Motor Vehicles, and in particular, Mary Pongonis, to get documents, reports and forms that can be used in our workshops. We will be sharing these materials with the participants in the workshops. We will demonstrate how the forms can be used in a control system by different people for different reasons the selectmen in their oversight role, and the treasurer and clerk in conjunction with their responsibilities.
Local government has a 20-30 percent turnover of elected officials each year, how do we keep continuity with our internal control system when it depends on these officials?
Once you get a control system and control culture established in your organization, it is going to help tremendously when new people take over their responsibilities. Employee turnover, or in this case elected officials turnover, is one of the best reasons cited by accounting and auditing literature as to why you should have written policies and procedures. Also, the procedures should be tailored to the size and complexity of the organization. Often, we convince ourselves that this would be too much work and not worth the effort. I think this may have come about when someone from a very, very small town was shown a two-inch thick manual that was bigger than all of their town records for the year. Im sure Im exaggerating a bit here, but the point is that a small town may not need more than a few pages for its accounting policies and procedures. Also, I believe we should address the most important issues first, so we dont get overwhelmed. Its important to start doing something to help your town now.
Does the structure of small town government in Maine have built in exposures or risk for fraud, theft and embezzlement? Specifically, Im referring to the situation where one elected official is the treasurer, tax collector and clerk.
The small size of an entity certainly reduces the possibility of having adequate segregation of duties. For example, segregation of duties could mean that one person receives the cash, records the cash in a journal or ledger, deposits the money in the bank, prepares financial statements and reconciles the checkbook. This is an example of poor segregation of duties because the person handles all aspects of the transaction. To compensate for a lack of adequate segregation of duties you must have additional oversight activity by the selectmen in this example. The selectmen would have to have some "hands on" involvement in reconciling the checkbook and/or procedures. If the selectmen want to delegate this responsibility to a finance committee or audit committee of the board of selectmen, I believe the statutes allow for this.
Are there psychological hurdles to overcome in instituting internal controls? In other words, will some people take these actions as being an affront to their honesty and integrity?
Im certainly not a psychologist but Im sure there are some hurdles. Its probably like having an open door policy in an organization and yet when there are a lot of secret "closed door" conferences going on people are naturally suspicious or at least very curious. How do you overcome these barriers? I believe its a matter of developing trust between people. If we all take a very positive attitude that what we are doing is in the best interest of the citizens of the town, and that we are not automatically going to take punitive actions against people when the system has not been as strong as it could have been, then we will move forward together.
Going back to my closed door analogy, the best policy in government is an open door policy. We are all doing the peoples business and we should not create an environment of fear or hostility toward one another. We need to work together. We need to be open about the weaknesses in our system so that we can all contribute to fixing them. Public service is not one persons job, it is everyones job. Our citizens deserve our best efforts to get along, work together, and make good things happen.
I believe that the partnerships that the Department of Audit has formed in developing this new training program demonstrates what we can do when we work together. Im very proud to be associated with this effort and will do everything I can to break down the psychological barriers should they arise. The vision that we should all share is that this effort is in the best interest of strong local government. The Department of Audit and our participating sponsoring organizations look forward to seeing everyone at one of our workshops on "Partners for Public Accountability".
"Partners for Public Accountability"
The tentative schedule of a workshop on internal control policies and procedures has been announced by MMA and the Maine Department of Audit. Workshops are repeated on consecutive days in each location. All workshops run from 4:00 to 8:00 p.m.
Locations and dates of the workshop are: in York on March 24, 25; in Rockland on April 27, 28; in Presque Isle on June 15, 16; in Calais on September 15, 16; in Bangor on October 27, 28; and in Augusta on November 3, 4.
A registration brochure that more fully describes the workshop will be mailed in February. For further information, contact Joan Kiszely at MMA, 1-800-452-8786.