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Small Town Accounting Horror Stories

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Local governments in small towns are especially challenged when it comes to the talent pool of bookkeepers and accountants. To complicate things further, some may be using archaic systems that are nearly impossible to upgrade. Plus, GASB keeps putting out new standards that add to the complexity.

Oct 29th 2020
CPA
Columnist
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The following are a few of the accounting horror stories that kept me up at night when I was doing governmental audits.

We Don’t Need No Stinkin’ GL!

Big Dry County, as I’ll refer to it, had inherited an archaic system for tracking its finances. It was split between two systems so they had no general ledger “until we build it,” as the audit partner told us during planning.

My memory is hazy on the details, but I believe one part functioned like a checkbook, where inflows and outflows could be tracked. Balance sheet functions like receivables and payables were on a separate system, or something equally bizarre. Nevertheless, the finance team managed to make it work and did a great job despite not ever having a single source of truth!

Books? What books?

A small town in central New Mexico contacted us to do their audit. Lisa, our audit manager, made the drive out there to get an idea of the state of their books before we put in a formal bid.

No one had updated their accounting system for the last several years. The town manager showed our audit manager a literal pile of bank statements, invoices and other financial records. Lisa told the town manager to hire a bookkeeper and then call us….we never heard back!

We Have No Opinion

Smalltown, as I’ll call it here, was in dire straits. They had hired a sole practitioner auditor to audit their 2003-2005 financials. He started on the job, but shortly after, health problems had sidelined him.

By the time he resurfaced enough to let Smalltown know he couldn’t complete the job, they were three years late! So, my firm came in to “save the day.”

A finance manager and a clerk handled all the bookkeeping for the town. In such a small town, finding someone who knew their debits from their credits was clearly a problem. So, perhaps it’s not surprising that we discovered some fairly glaring errors.

Those errors were so bad that our audit opinion for those three years was a disclaimer. That is to say, we couldn’t find sufficient evidence to form an opinion that their financials either were or were not materially correct.

Unfortunately, things haven’t changed. When I checked the State Auditor’s website to see if Smalltown had managed to sort out their mess, the most recent audit report was for the 2014 fiscal year and again, it was a disclaimer. Some of the findings we reported back in 2003 were still not resolved.

Here are some of the problems we found:

Cash wasn’t reconciled regularly. The bank recs I did find didn’t tie to anything; not the bank statements, not the balance in QuickBooks. In the last year we audited them, cash was off by more than $100,000.

We asked for the fixed assets register and they gave us a fat binder with hand-written entries that hadn’t been updated since 1995. They had no other records and no one had any idea how accumulated depreciation or annual depreciation expense had been calculated in the past. Even the new fire truck the town bought in 2003 wasn’t in QuickBooks. That $90,000 purchase was recorded as an expenditure!

They had no consistent process for handling payments when residents came in to pay property taxes or utility bills. Some residents got numbered receipts, some did not. They also never reconciled the ledger where they tracked customer utility accounts with the balance in the general ledger. They treated utility deposits as revenue and refunds as expenditures.

To their credit, the finance manager and the clerk were really trying. As far as we could tell, the town’s bills were getting paid, bond payments were up to date and resources were being handled appropriately. We saw no signs of fraud. They were just in over their heads and likely inherited a mess when they came on board.

You Mean Those Cash Payments Weren’t For Me?

Here’s a tale I heard from a consultant who helped out some troubled housing authorities. The aunt of one of the tenants at what I’ll call the Really Smalltown housing authority decided to pay her niece’s rent as a gift and asked for a receipt.

According to the receipt generated by the HUD rent payment system, the niece was months behind on her rent payments. Confused, the aunt asked her niece if that was true. “No,” she said. “I always pay in cash on the first of the month.”  An investigation later revealed that the director of the housing authority in Really Smalltown had been pocketing all the cash payments that tenants made for more than a year.

It Doesn’t Have To Be This Way

Being from a rural area or small township does not always guarantee that the local accounting will be subpar. In fact, one of the last audits I worked on was for the housing authority in what I will name Itty Bitty Village, up in the mountains.

They hired an outside bookkeeper who specialized in working with housing authorities in small towns across the country. She did an outstanding job for a very reasonable monthly fee. Everything tied, everything reconciled and to boot, she was a delight to work with.

Now, I have met many truly stellar accountants working in small town governments, so I know it’s possible to do great work with limited resources. And I would encourage young accountants living in small towns and rural counties to consider a career in government accounting. This can be a fantastic opportunity to really make a difference.

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