Primary forensic audit discovers $2 million discrepancy

The Marlin City Council received the long-awaited forensic audit compiled by Stewart and Hurst, a Houston-based financial auditing firm, during their April 14 virtual City Council meeting. 

The firm was unable to address and resolve all issues presented and will be continuing the process upon receipt of additional documents. 

In the meantime, William Stewart (the “Stewart” in ‘Stewart and Hurst”) will be helping the City of Marlin’s current financial director, Judy Sisk, put some new internal control in place. He will be providing this service at no additional cost.

“[Stewart] stated that our finances were in such bad shape that he is willing to donate his time to help the city create better systems that can be audited easily,” Mayor Carolyn Lofton said in a Facebook statement on April 19. 

The report says that it was the 2017-2018 Annual Financial Review Audit, performed by Donald L. Allman, CPA, that initially “identified material weakness in the internal controls over financial reporting.” The 2017 report found six invoices that were paid twice, totalling $3,539. 

Stewart and Hurst requested documentation regarding 26 additional questionable invoices and reviewed voided checks less than $5,000, finding that none of the reviewed checks have cleared the bank. This means that none of the voided checks were ever cashed and funds were not used.

This issue can be fixed by putting in a better internal control system in all areas of finance and by segregating the duties during the input process. These will minimize the control held by a single individual over finances.

While auditing bank statements, the auditors looked for payments to vendors and employees that could be seen as “luxurious” expenditures and expenses unrelated to the City of Marlin. There are missing documents still, but according to the report, auditors “have not identified any such payments in the statements reviewed.”

It was during this process that the auditors identified a number of bank accounts that the City of Marlin was unaware of. The city informed the firm beforehand that they were unaware of the scope of accounts still held and asked for help in identifying them. Additional bank statements have been requested for the accounts found. 

One of the accounts looked at, considered a “pledge” account, had three transfers totalling $2,029,774.30, all sent to the same unknown “internal” account, according to the report. It also states that the City of Marlin is not in charge of the pledge account and has zero control over it.

All three transfers took place on Jan. 26, 2018, and have the tag “Payment of Funds as Requested” noted on the bank statements. It is not yet known if the funds are still in the other internal account or what the payments were for, but documentation has been requested from that respective bank in order to find out.

The report details that there are many questions still surrounding the city’s bank accounts, but that these will hopefully be answered with the requested documents.

When looking over the financial statements related to employee reimbursements, all transactions from the 2017-2018 fiscal year were discovered to be business related. This means that there were no payments made that were unrelated to the City of Marlin or solely for the benefit of the employee receiving the funds. Less than $1,700 was dispersed to employees during that time.

The water payment reconciliation process is still incomplete, but the report notes that November 2019 and January 2020 have seen an increase in collections. 

“The increase can be primarily attributed to collections related to Levy Current and Lecy Delinquent,” it states.

This is the collection agency that the City of Marlin utilizes to assist in the collection of closed accounts.

Auditors are waiting on additional documentation related to closed accounts as well. They initially had questions pertaining to how the customer relocations work and are awaiting follow-up documents to ensure the process is being properly followed. 

In relation to Grants and Bonds held by the City of Marlin, the report says that the auditors found that there was little to no consistency in the tracking of deposits, disbursements, and receipts. It also states that there is not currently a full list of grants and bonds available, but that in looking at the bank statements, auditors were able to match payments to their respective loans.

Nearly all of the recommendations show that there needs to be new systems put in place to ensure that the City’s finances are being properly tracked.The addition of these processes will be an essential tool in making sure that this problem does not manifest itself again.

A new financial director was brought in shortly after the departure of Vicky Grimes especially to help the City of Marlin clean things up. Judy Sisk is ready to tackle the placement of  new internal controls with Stewart.

“Wow,” she said upon hearing that the forensic auditor would be staying on, free of charge, to assist her for an entire year. “I appreciate that and I look forward to working with him.”

Auditors from Donald L. Allman, CPA, were on site in the past weeks, conducting the 2018-2019 annual audit. According to Sisk, it should be coming by the end of April as well. There may be new findings when looking at the 2018-2019 audit, so stay tuned for updates on Marlin’s finances as the story develops.

For additional information on the forensic audit or to view a copy, head to marlintx.net and click on the “Forensic Audit April 6” tab in the left hand column.