Audit report dings Lansing for financial issues — and a risk for fraud

(This story was updated at 11:25 a.m.)

TUESDAY, Feb. 16 — An independent audit shows a series of “material weaknesses” were tied to the budget for the city of Lansing last year — including a list of misstated financial records, a lack of internal oversight and an increased risk of fraud.

Mayor Andy Schor said some of those issues are likely to persist for years while the COVID-19 pandemic continues to thrust the city into a lingering state of financial uncertainty.

“We’re going to continue to have material issues on this until something greater happens,” Schor told the City Council this week. “This is going to continue to be a material weakness until we’re able to come up with solutions. I invite any member of Council to work with us on this.”

The report, by the local accounting firm Maner Costerisan, shows the Michigan Treasury Department notified city officials of financial “errors and omissions” in December, requesting an explanation within 30 days on why expenditures for the latest fiscal year exceeded amounts authorized in the budget approved by the City Council. The letter also called for corrective action and details about what was being done to fix the issues.

“Actual expenditures exceeded the amounts authorized in the budget. Please describe actions being taken to prevent budget variances,” state officials wrote, noting the issues were either a violation of a state finance statute or could impede the city’s ability to comply with state law.

State officials also warned that a failure to submit a “corrective action” plan could result in withheld state funding and inhibit the city’s ability to take out state loans on upcoming projects.

City Council members were quick to point out that the findings were not unlike past audits. Still,

city officials were reminded last month to submit a response after they missed the deadline.

In a response to the state, Maner Costerisan noted this month that expenditures exceeded budgeted amounts for “several areas” of the budget, largely because the city didn’t fully monitor expenses over the last year, putting it out of compliance with the law.

In its response, the city said it “always wants to have a tighter rein” over the budget, noting staff estimate “conservatively” to stay solvent. City officials also promised to monitor finances more closely to keep the budget closer in line with actual expenditures. Finance Director Rob Widigan assured the City Council last week that his staff was working to quickly address the concerns.

“I can’t tell you we’ll go down from eight to zero. The timeline depends on our resources and what fires come before us,” Widigan said “I take these comments to heart. We all take these comments to heart. I’d like to see at least two or three (audit issues) off the list by next year.”

State officials also requested corrective plans for additional financial deficiencies. Among them:

• The city’s accounting records were initially misstated during a recent audit, in part due to staffing reductions and turnover that “contributed to journal entries not being completed or reviewed on time.” The plan: City officials will review the recent corrections and develop a plan to address the “most significant issues” in a timelier manner this year.
• Bank reconciliations weren’t completed in a timely matter, if at all. Several bank reconciliations weren’t done until about four months after the fiscal year had ended, while the latest audit was ongoing. Several accounts still had outstanding reconciliations. As a result, cash transactions carried an “increased risk” for misstatements, whether caused by error or fraud, which wouldn’t have been quickly detected or corrected. The plan: City officials said they’re taking steps to ensure those reconciliations are updated.
• Officials didn’t evaluate the city’s pension and benefit obligations until December, instead relying on projections that weren’t updated until after the latest audit was complete. As a result, the city couldn’t have verified that pension census data and other details were properly recorded and may have fallen out of compliance with state finance laws.
• Auditors were unable to verify the accuracy of pension contributions over the last year and were also unable to reconcile those payments to any supporting financial records. There was also no documentation of an independent review over pension and benefit calculations, creating a risk that misstated financial records would go undetected.
• Proper internal control procedures and policies have not been developed and put in place by the city surrounding multiple aspects of its unfunded pension and benefit obligations for retirees — leading to another risk of misstated financial records.

The Plan: In response, city officials pitched the development of an “action plan” for more accurate record keeping and to provide more timely information ahead of the next audit. Officials will also review reporting requirements to ensure compliance with state law.

• Internal oversight mechanisms over other specific revenues — like the annual return on equity from the Board of Water & Light — did not appear to exist. Auditors noted they were unable to verify the procedures the city used to reconcile and verify those amounts. The Plan: City officials have launched a process to verify that it is actually receiving revenue from BWL facilities and will also develop more oversight on sewer revenues.
• The city’s general ledger was incomplete prior to the latest audit, leading to potential misstatements without supporting documentation. Internal policies remain under review. The Plan: City officials blamed staffing reductions and turnover in the finance department but also highlighted plans to “address the most significant issues in a timelier manner.”
• The city was cited for having no business continuation plan as required by state law, meaning there is no formal plan should “critical business processes'' be interrupted. Auditors also didn’t find policies for electronic transactions, debt management and compensated absences, meaning there was “no formal expectations” for city employees.

The Plan: City officials vowed to review and develop new internal policies as necessary.

• There was no “proper” oversight over internal payroll controls, meaning inaccurate amounts could’ve been paid to employees over the year either by fraud or in error. Auditors found that payroll can be submitted and paid before managerial approval — a “systemic issue” that didn’t actually result in auditors finding “inappropriate transactions.” The Plan: The city listed plans for more oversight from its Human Resources employees.

Contracted auditors explained to the Council last week that many of the issues listed in the report, like the misstated records, were “pretty common” in other cities in Michigan. They also stressed that the report focused only on a single point in time. Some issues have been fixed.

Finance Director Rob Widigan said the city takes the findings seriously and will “actively work diligently to address them” — including by hiring a contract employee to reconcile financial statements. He said the path to a clean audit will take time, but remains a “priority” for his staff.

“This does not mean that a misstatement exists, just that there is a possibility it may not be detected or corrected on a timely basis,” he said. “The auditor found no transaction entered into by the city during the year for which there is a lack of authoritative guidance or consensus.”