Because the City Refused to Stop Forging Financial Statements the Auditors Are Forced to Issue Disclaimer.
The City of Beaumont has released a Draft Audit of the 2015 Financial Statements: http://www.ci.beaumont.ca.us/DocumentCenter/View/29120
The City has removed the Auditor’s Report and refuses to release it, but at the 44:00 minute mark Greg Finkhanel from the Auditing Firm of VanLant Finkhanel told the Finance and Audit Committee that they will Issue a Disclaimer Opinion because the City insisted on submitting forged Financial Statements.
Most of the forgery is in the Sewer Fund. It’s already been proven that the $50 Million claimed for Sewer Machinery and Equipment was money funneled to Urban Logic from the Bond Fund Accounts. If there are no Receipts for actual parts the City can not claim the money as machinery and most certainly can not depreciate machinery that was never purchased.
Note 5 records $76 Million in Sewer Machinery and Equipment and $23 Million Depreciation. Note 5 also shows $2.1 claimed for Vehicles with $1.5 Million Depreciation. The Sewer Plant has no Vehicles.
The other Material Misstatement is Note 2: claiming $29 Million Money Market Mutual Funds under ‘remaining maturity’. That money represents the Bonds’ Reserve Funds and it not available until the Bonds are paid off, which is more than 5 years away for all Bonds.
If the City would make the above changes the Auditors could give an Opinion.
With a Disclaimer the City has wasted 18 months and hundreds of thousands of dollars paid to Lawyers and Consultants to try to push through forged Financial Statements.
Note 9 Financial Condition and Managements’ Plans listed the following Fund Deficits:
Government Activities: Negative $89,979,209
Business-Type Activities: Negative $2,786,155
General Fund: Negative $7,188,931
Sewer Enterprises: Negative $2,606,079
Pension liability is over $12 Million
The Auditors tried to explain the significance of the situation to the Beaumont Audit and Finance Committee, but it was like talking to a high school club. At the end Melana Taylor did most of the talking to control and divert the conversations.
Quote of the night from Finkhanel: “..it wasn’t appropriate to show your own Debt as an Asset.”
2014/2015 Draft Audit: http://www.ci.beaumont.ca.us/D…
Beaumont Finance and Audit Committee Meeting December 19, 2016: https://www.youtube.com/watch?v=yvzTOxHuOJk&feature=em-lss
9:00 Finkhanel: There are a few different sections to the Audit and I think you’re still working on what’s called ‘The Management Discussion and Analysis’. That’s something the City still has to do, which is a narrative that’s placed towards the beginning of the document describing your financial highlights for the year. Our Audit Report will be near the beginning of the Financial Statements also. We were hired to Audit the Financial Statements for the City. Our focus is on the Financial Statements.
10:00 Finkhanel: Again; I want to point out that our focus in on the numbers in this Report and also the ‘No Disclosures’ that are just as important. Management of the City is ultimately responsible for the preparation and fair presentation of these Financial Statements in accordance with GAAP. I want to mention that includes establishing strong Internal Controls to ensure that you’re able to prepare an accurate Report. Our responsibility as Auditors is to express, we come in and express and ‘Opinion’ on these Financial Statements based on Audit Procedures.
12:00 Finkhanel: There can be a few different types of Audit Opinions. There can be an ‘Unqualified’, a ‘Clean’ Audit Opinion. Auditors can end up with a ‘Qualified Opinion’; where they ran into evidence indicating the Financial Statements are not prepared in accordance with the Standards. There also can be what is called a ‘Disclaimer of Opinion’; where the Auditors are not able to obtain sufficient evidence to state an Opinion on the Amounts and the Disclosures in the Financial Statements
15:00 Finkhanel: Those numbers on the bottom represent your Net Position. At June 30 [2015] your Net Position, your Assets less your Liabilities. As you can see in the first column is your Governmental Activities, your General Fund and all of your Special Revenue Funds is about $57 Million Negative Net Position. Which means you’ve got $57 Million more in Liabilities than Assets. The second number, the $49 Million positive is your Business type, but in the 2014/2015 year there were several restatements of the Beginning Net Position.
19:30 Finkhanel: The almost $90 Million Unrestricted Negative Net Position – that’s the Governmental Activities. It’s your General Fund, your Special Funds. That’s really an important number there.
20:45 You’ve got a $7 Million Negative Unassigned Fund Balance in the General Fund.
23:20 Melana Taylor: A lot of Cities got bonds issued for their Redevelopment Projects or they got bank loans or some other financing. In Beaumont they used Cash that was in the General Fund at the time. As time progressed and the economy changed the General Fund no longer had money to advance the Redevelopment Agency and the Redevelopment Agency also didn’t have the money to pay it back. When the State changed the rules and took back the Redevelopment Agency, the State then made the determination of what loans, what debts would be allowed for repayment in future tax monies that come through in the Successor Agencies instead of the Redevelopment Agencies.
24:00 Taylor: They have not granted the City of Beaumont’s loan to the Redevelopment Agency as a viable loan source that is subject to repayment, we’re still having that discussion with the State. In the mean time, since the State has final say and they’ve said no no no, we then put an allowance on that loan. It’s unlikely we’ll be able to collect any of that, but we’re still trying.
25:00 Taylor: We’re in our final pleading and they’ve said no all along.
26:30 Finkhanel: The Sewer Fund itself shows a Negative Unrestricted Net Position, see the $2.6 Million. The Total Net Position is about $47 Million, but most of that is tied up in Capital Assets, the big Assets that the Sewer Fund owes that are being depreciated. [glares over to Taylor]
27:00 Finkhanel: You don’t want to see a Negative Net Position in an Enterprise Fund.
Committee Member: That means what?
Finkhanel: That means you may not have enough cash on hand for emergencies or whatever you might need, Reserves.
28:00 Taylor: The $2.6 Negative is basically Operational. It had been running at not a positive bottom line and we had the [2001 Wastewater Bond] Debt Payoff at the same time in Fiscal 2015 when they had to pay off the Bond entirely.
30:00 Finkhanel: Fiduciary Funds, which would be your Agency Funds and your Successor Agency to the Redevelopment Agency that we discussed earlier. There were some changes in the Agency Funds from last years’ 2014 Financial Statements. There were some big changes in the numbers there. Mainly, there was a couple hundred million in Assets reported that are not there any more.
31:00 Finkhanel: Agency Funds are supposed to be Assets that are held on behalf of others. You’re just the conduit, you’re just the middleman taking it in and passing it along to whoever it goes to. But the $200 Million you were showing as an Asset was really owed – it was offset with ‘Due to Bondholders’ , but the Bondholders were the City. The Financing Authority was buying the … Anyway, it was your own Debt, your own ‘investments’ in Bonds that was being reported, so it wasn’t appropriate to show your own Bonds as an Asset.
34:00 Taylor: The City has always recorded Fixed Assets and Depreciation in the Proprietary Mode, in the Business Funds, always for Sewer, always for Transit. But the City has never recorded the Infrastructure and Assets of the City and that’s the piece that I keep saying I’m going to get to.
Committee Chairman: You’re talking about buildings and structures and streets, right?
Taylor: All of that.
Chairman: And no Depreciation has ever been written off for that?
Taylor: No. Instead, as soon as they purchase the Asset, whatever it is, a truck or a desk, they write it off at that time so there’s no Depreciation, it’s just Expensed. It’s expensed as they go, which is why there’s no Assets.
35:00 Committee Member: We’re talking about past, that’s not our rule?
Taylor: That’s not our rule, but I have to finish the RFP Process and have someone come in and do a full evaluation of all City Assets; buildings, equipment, vehicles, machinery, furniture..
36:00 Taylor: Each Department does know what they have and what kind of lifecycle they’re on, what needs to be replaced, it’s just that the financial records don’t reflect it. That’s something we’re moving toward correcting.
[From left field; Committee debates bringing back Brian Deforge’s daughter at $100,000/year to be a ‘Grant Writer’]
38:00 Finkhanel: Note 6. It shows your Long-Term Liabilities.
Committee: Awww
[Todd Parton walked in at 38:10]
Finkhanel: You can see the additions to your Long-Term Debt there. The WRCOG Judgement; I guess in the future that will be a little more certain what’s going to happen with that, but based on the current information; that’s the Liability you’re reporting. You can see the Net Pension Liability being added to your Liability. It ended up at about $10 1/2 Million for Governmental Activities. There is also a new Payable to the Successor Agency of $4.2 Million based on what the State is saying.
39:00 Committee Member: Are we making payments on at least the Interest for this WRCOG?
Taylor: No
Committee Member: So we’re allowing it to accumulate and compound?
Taylor: Yes.
Committee Member: Okay.
39:30 Finkhanel: Note 7 has all the Debt that has been Issued that is not the City’s Debt, it’s called ‘Debt Without Governmental Commitment’. It goes on for many pages. [Committee Members laugh]
40:00 Finkhanel: Note 8 has all these new Pension Disclosures
40:45 Finkhanel: Note 9, which discusses your Financial Position and what Management’s Plans are addressing the situation. This Note is mentioned in our Audit Report. It’s a significant Note.
41:00 Finkhanel: There’s a few Commitments and Contingencies disclosed in Note 10. In Note 11 describes the deeming as Uncollectible. Note 13 has all the Restatements described in Great detail. After the Notes there is required supplementary information mainly with Budgetary Reporting and also the Net Pension Liability Disclosures required by the Standards.
43:00 Finkhanel: There are other Reports that are going to be issued as a result of our Audit. Ultimately we’ll be giving you Drafts of a few more that always accompany the Audit Reports. There is going to be an Internal Control Report. It’s going to have several pages of various Findings and Recommendations. Each Finding will have a section for Management’s Response.
Committee Member: Is that were you’ll have the Audit Opinion and levels of risk?
Finkhanel: The Audit Opinion is going to be in this Document.
Committee Member: We don’t have that yet?
Finkhanel: Yea, I don’t know that you got that, but a …
44:00 Finkhanel: I should mention, I started to describe the Audit Opinion. We’re Issuing a Disclaimer for various reasons. There’s a lot of uncertainty out there, especially with Beginning Balances and things that have gone on in the past, investigations by the SEC and ..
Committee Member: From your personal experience; a Disclaimer, what type of light does that cast on the City?
[Lloyd White walks in and sits by Parton]
Finkhanel: I’ve never issued one before.
Committee Member: Okay, so that’s a good start, right? We’re a first!
Finkhanel: It’s something that has to be ultimately dealt with. You don’t want to keep getting a Disclaimer. At some point you want to move on and move forward. We’ve done a lot of procedures, but we’re not able to feel comfortable enough with the evidence. We did a lot of work, but we’re not making any … stating any opinion on it.
45:00 Finkhanel: I guess we didn’t get you a copy of the Draft, but there’s a big paragraph describing the Disclaimer. We will get you all the additional reports that will disclose all that as soon as possible.
Nancy Carroll: The Recommendations that were talking about; Melana, have you received that yet or has that not been written?
46:00 Taylor: That we haven’t gotten yet. These are going to be… it will be something like the State Controllers’ Office, but it will have more detail and be more specific to the City of Beaumont. I know that’s going to take a while and I expect that to be a really nice novel. [Taylor changed conversation from Auditors Report to Internal Controls Report, but Carroll doesn’t know difference]
Finkhanel: We have it drafted up for the most part and we have to obviously get your response.
Taylor: We’re just trying to get past the presentation and the numbers, then we can get into the Internal Control Findings and the Internal Control Findings as of June of 2015, so ..
48:00 Committee Member: How far behind are we to getting to June 30, 2016?
Taylor: We have to get 2015… and then 2016; I have Staff and we’re working on putting together Audit Schedules now, making sure we have everything accounted for and reconciled. If they wanted to start the Fiscal 2016 tomorrow, I’d tell them wait.
Committee Member: Well, they haven’t ran away, they’re staying with us giggle giggle.
Taylor: We’re hoping to have the schedules all hammered out and clean and much easier to Audit this time.
49:00 Are the possibilities slim for the Opinion in 2016 or are we running towards a Disclaimer Opinion in that year?
Taylor: It depends on the Reconciliations; getting them all straight and being able to rely on them. I am working towards that. I’ve not finished the Mitigation Funds. I’m still working on all the CFD numbers improvement area by improvement area.
53:00 Todd Parton: We’ll be looking at the Sewer Plant Financing that we need. We need to look at our Rate implications and we need to look at our Funding options. Right now there’s about $85 Million that we would need to secure financing for the Sewer Plant Project. One nice thing is that we’ve been working with the Agency to try to see if there’s a way we can kind of Amend the Standards that we’re using at the Plant. If we can adjust those; there’s a chance that we can push the Permit Capacity from 4MGD to 41/2 Million Gallons per Day. That buys us basically another 18 months’ time. So we’d have to get that in writing and get our Order Amended accordingly, so there’s a little bit of work to do there.