January 4, 2006 The 2001 Hamblen County Audit: Unbelievable!

Hamblen County, like all counties in the state of Tennessee, is required to have a financial audit performed each year.

I have discussed audits periodically. Now it’s time to look at our recent county audits—starting with the 2001 Hamblen County audit.

If you have attended commission meetings or watched them on cable TV, you may have heard County Mayor David Purkey label the county audit as our “financial Bible” as though it is the final and accurate source of information about county finances.

In light of what I will present here about the 2001 county audit, it is unlikely that anyone could or should ever consider Hamblen County’s audit as a financial Bible or as an accurate source of information.

With Enron, Worldcom, and other auditing scandals, it is unlikely that the general public (or even auditors themselves) would make a sweeping claim of financial accuracy and infallibility when they know that a financial audit, such as the one performed for the county, is only a review of a small sampling of transactions along with a review of some county commission minutes and a review of compliance with a number of state laws and regulations.

Financial audits, as the Comptroller of the State of Tennessee has stated, are limited in scope and are not intended to detect fraud, waste, or abuse. (See my post of November 2, 2005, quoting the State Comptroller’s Office).

NOTE: While auditors do not look for fraud, waste, or abuse, it is possible that a financial audit, if it just happens to review a questionable transaction among its regular small audit sampling, might make a report of that transaction for further review and additional audit work.

There are a number of people who have been told and who perhaps believe that surely an audit at least provides accurate income and spending records for departments and agencies of county government.

County audits have a function, but the State Comptroller has noted that the function is very limited.

Accounting scandals involving huge companies that were "audited" by top-notch auditing firms indicate that financial audits are only as good and thorough as the auditor, only as complete as the number of transactions that are reviewed, and only as accurate as the information that is provided to the auditor by the county government.

If you take even a brief look at the 2001 county audit (for which taxpayers paid about $28,000 to the previous local private auditors), you will see that the auditor either ignored or encouraged the presentation of useless and false “spending records.”

The spending records provided by the County Mayor, as the county’s chief financial officer, to the auditor in 2001 have been manipulated and altered through multiple adjustments at the end of the year, and the use of these records in preparation of the official county audit of actual spending makes a mockery of the concept of financial accountability.

The 2001 audit is full of spending records that have been purposely altered and adjusted and manipulated at year end apparently for two reasons: (1) to make it appear to the Commission and to the public that numerous spending totals as of 6/30/01 were exactly the same as the perfectly even spending amounts that had been budgeted; and (2) to shift spending amounts around to control spending amounts that were reported for various departments.

Certain year-end audit adjustments are normal--such as when one finds that gasoline has mistakenly been paid out of an insurance line item.

However, what are termed “adjusting entries” in the 2001 audit are more appropriately termed “audit manipulations” in my opinion. The manipulation of line item after line item with these adjustments at the end of 2001 fiscal year (6/30/01) led to the presentation of false and misleading records and reports of county spending within departments.

Here are just a few of the approximately 80 examples of exact spending amounts from the 2001 audit:

Election Commission:
Exactly $1,500 budgeted for travel; exactly $1,500 spent.
Exactly $1,500 budgeted for office equipment; exactly $1,500 spent.

Planning Commission:
Exactly $2,000 budgeted for gasoline; exactly $2,000 spent.
Exactly $7,900 budgeted for office equipment; exactly $7,900 spent.

County Courthouse (buildings):
Exactly $35,000 budgeted for electricity; exactly $35,000 spent.

Property Reappraisals:
Exactly $4,000 budgeted for legal services; exactly $4,000 spent.
Exactly $3,500 budgeted for postal charges; exactly $3,500 spent.

Juvenile Court:
Exactly $3,500 budgeted for evaluation and testing; exactly $3,500 spent.
Exactly $1,000 budgeted for travel; exactly $1,000 spent.
Exactly $2,800 budgeted for office equipment; exactly $2,800 spent.

Sheriff’s Department:
Exactly $70,500 budgeted for health insurance; exactly $70,500 spent.
Exactly $4,000 budgeted for other equipment; exactly $4,000 spent.

Jail:
Exactly $15,000 budgeted for overtime pay; exactly $15,000 spent.
Exactly $72,000 budgeted for health insurance; exactly $72,000 spent.
Exactly $5,000 budgeted for other supplies/mtls; exactly $5,000 spent.
Exactly $6,500 budgeted for other charges; exactly $6,500 spent.

I could go on and on, but anyone with common sense can see what’s up. If anyone thinks that you can budget to the penny and then end up with exact spending totals with absolute, to-the-penny accuracy as shown in the above sampling of audit entries, then I have lots and lots of swamp land in Arizona to sell you.

Just how did the county end up with these "perfect spending” numbers? Through end-of-year manipulation of spending records—manipulations that were given the name “audit adjustments” or "adjusting entries."

Here are two examples of "adjusting entries" that were made at the end of the fiscal year (6/30/01) by the Finance Department in the Office of the County Mayor to make spending amounts appear exact (but inaccurate) in the 2001 audit:

Jail Insurance was $104,284.42 as of 5/25/01.
Then on 6/30/01 there are two entries. One is an adjusting credit entry of $43,573.84. The other is a debit entry of $11,289.42.

$104,284.42 – 43,573.84 + 11,289.42 = exactly $72,000.00 reported as jail insurance costs in the 2001 audit

County Courthouse (buildings) Electricity was $41,455.21 as of 6/8/01.
On 6/30/01, there is an adjusting credit entry of $6,455.21.

$41,455.21 – 6,455.21 = exactly $35,000.00 reported by the auditor as electricity costs in the 2001 audit

When have your household electricity, insurance, travel, or gasoline costs ended up exactly $1,500, exactly $2,000, exactly $6,500, and on and on?

Now about that 2001 Financial "Bible"?

Who manipulated the actual spending records for the General Fund at the end of the year and why? Who gave the financial information to the local, private auditors to report in the audit?

How could an auditor accept and report these obviously manipulated spending numbers as the "actual" record of department spending?

What did each department really spend on these line items and what was the real total of spending for each department?

No wonder the county had deficit spending in 8 of the 12 years from 1992-2003. Apparently, no one was told and no one ever knew what had really been spent in the previous year! And no one asked!

And the County Mayor tells the public that the Hamblen County audit is the source of accurate financial information about the county's finances?

And the County Mayor tells the public that the audit is the county's financial Bible?

More on 2001 tomorrow.

It has not been a pleasant experience in finding out what has been going on. It is very difficult to put this information out. I used to have a great deal of trust in people, and I thought that elected leaders always had the interests of the public and taxpayers foremost in their thoughts.

Now I know that you should continue to have a level of trust in people, but you better verify everything just to be sure that you are not surprised down the road.

As I start on this series, I am prepared for the personal attacks that are inevitable whenever the truth is told about county finances.

I just hope that those who always explode with anger and pent-up rage and personal attacks will count to 35,000 (exactly the number of dollars reported as spent on electricity in the 2001 audit) before they explode.

Hamblen County is in difficult financial times. Our financial problems can be solved, but our ability to find solutions is limited unless we face the truth of what has happened and face our problems with that knowledge.

A willingness by all parties to co-operate in measures that promote accountability and that control spending would be a good first step. A willingness to provide accurate financial information to the county commission and to the public would be an excellent second step. And a willingness to address and deal with facts and not personalities, while avoiding rants, would be a nice idea, too.