City stung by 'horrible' audit results

City of Bainbridge Island financial statements for 1999-2000 contained so many errors, that the city’s affairs could not be audited for the period.

Even after three attempts by city finance officers to provide accurate information, the books were still riddled with mistakes.

So the auditor “disclaimed” the statements altogether and refused to issue an opinion on the city’s financial condition, a black mark in an unflattering report.

“It’s horrible,” Mayor Darlene Kordonowy said of the audit results. “I won’t argue – absolutely horrible.”

The accounting problems came to light in the second of two reports released last Friday by the state Auditor’s Office.

The first, an “accountability audit,” included four significant “findings” involving missing or poorly managed billing records and documents.

No evidence of malfeasance was found, but several of the deficiencies left a window open for mismanagement of public funds, state officials said.

City officials said this week that those problems have already been corrected.

But it was the second document, a “report on financial statements,” that left the administration reeling.

In fact, the findings raised questions about the city’s ability to sell bonds later this year, to pay for open space purchases as approved by voters last fall.

“It’s the report card on the city’s accounting practices,” city Administrator Lynn Nordby said, “and it’s not a good one.”

The audit, which covered the years 1999-2000, did not actually get under way until November of last year because of the city’s failure to provide required financial information for 1999.

After three attempts by the finance department to provide accurate filings, auditors found that six account balances in the city books had not been changed from one year to the next; the Affordable Housing Trust Fund was misclassified among revenue sources; and public works projects under construction were overstated by more than $10 million.

So the auditor simply gave up.

“At the end of our audit, we determined that due to the disarray in the financial statements, further testing would not be a good use of public resources,” the auditor’s office wrote in its report.

“You reach a point of diminishing returns,” said Mindy Chambers, Auditor’s Office spokesperson.

Yet how the books fell into such disarray was unclear; city Finance Director Ralph Eells was on vacation this week and was not available for comment.

In a formal written response included with the auditor’s findings, Eells attributed some of the problems to “the way [the city] computer system deals with cash. The effort to make that critical reconcilement (taking over six man-months during the past year) has diverted effort from the timeliness of reporting.”

He conceded that “a number of posting errors occurred,” but said they had been corrected and that the effort “will result in the timely submission of our 2001 financial statements.”

Nordby led off Wednesday’s council meeting with a brief report, assuring council members and the public that “systemic deficiencies have been corrected, and will not be repeated in future audits.”

Kordonowy, who inherited the problems even before she took office – she met with auditors last December to discuss the problems as they were discovered – alluded in an interview to differences between the city’s budget and the accounting methods used by the state.

Typically, cities the size of Bainbridge Island are audited yearly. Yet state officials have been stymied in their attempts to review the city’s operations in a timely manner, frustrated by chronically late financial filings.

The problem dates back to the city of Winslow -- the required statements have been submitted late in 18 of the past 20 years, and nine out of 10 years since annexation.

In disclaiming the financial statements and offering a “qualified opinion” on the state of the city’s books, Chambers agreed that the auditor was essentially saying it’s impossible to determine the city’s financial condition.

Such a non-endorsement could affect the city’s bond rating and its ability to borrow money, a “red flag” that underwriters would note when determining whether the city is a good borrower.

“I’d hate to go into the bond market with this audit,” Nordby said.

It comes at an awkward time, as the city is about to issue at least some of the $8 million in bond debt voters approved last fall for the preservation of open space.

The Open Space Commission is currently soliciting properties for evaluation and purchase.

Timing may play back into the city’s hands; for cash-flow purposes, Nordby said the first of the bonds probably would not be issued until the end of the year. That gives the city time to redeem itself on its next audit, the results of which should be known this fall.

Kordonowy vowed that proper management of financial information would be a priority of her administration.

“It’s as simple as saying we’re going to file the information required at the time specified by the auditor,” she said.

And, in a first test of that resolve, the city did. Financial information for the pending 2001 audit was submitted on May 30 – the day it was due.

A team from the auditor’s office is expected to show up in July, with the results likely to be published in September.

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