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ISHPEMING -- The city of Ishpeming's 2022 audit was a mixed bag, showing areas of both concern and strength.
The Ishpeming City Council heard a presentation from the city's auditing firm, Anderson, Tackman & Company, about the 2022 audit during a special meeting Wednesday.
Certified Public Accountant Michael Grentz highlighted material weaknesses, "significant deficiencies" and issues relating to financial reporting, statutory timelines and internal controls in the audit presentation.
"The specific causes named for these conditions in the report consist of staffing shortfalls related to turnover and functional knowledge of finance and accounting," the city said in a press release.
When the city's finance director left in 2020, the city hired an accounting firm in 2021. The city discontinued the use of the accounting firm once a new finance director was hired.
According to the audit report, for approximately half the fiscal year, although bank reconciliations were being performed, they were not accurate and the general ledger was not appropriately adjusted.
City Manager Craig Cugini said that the areas of concern were brought forward by current finance director Grant Getschow, who began working for the city in May. Cugini said that once concerns were presented, actions were taken to begin rectifying them.
"That included immediate staffing changes and seeking specific help from not only the accounting professionals we were already working with for the audit, but also reaching out to the state to do everything we could, as quickly and carefully as we could, to begin fixing these issues," Cugini said. "While we take full responsibility for these shortcomings, we are working diligently to resolve all issues and position ourselves more strongly to deter them from happening again."
The first area of material weakness presented was the city's bank account reconciliation.
"During 2021, the city hired an outside accounting firm to assist with the duties of the finance director while the search for a replacement was ongoing. As part of that firm's responsibilities, bank reconciliations were performed. The outside accounting firm performed bank reconciliations accurately and timely," The audit report said. "Once the replacement for the former finance director was hired, the city discontinued contracting accounting services with the outside accounting firm."
And that's where the problems began.
The report noted there was no training or guidance provided to the new finance office manager on how to perform bank reconciliations.
"The finance office manager did not have an accounting degree or experience. Furthermore, there was no training provided by the outside accounting firm on the purpose of bank reconciliations, how to perform them and how to properly adjust the general ledger when discrepancies are identified," the report said. "There was a breakdown in internal control procedures and lack of appropriate oversight of the individual assigned the bank reconciliation function."
Because of this, the city's audit was not able to be performed on time due to the "prevalence of errors in the general ledger," the report said.
"Without key reconciliations being performed, the general ledger cannot be relied upon for producing accurate financial information to present to the city council and, as a result, the council will make uninformed financial decisions that could negatively impact the financial health of the city."
The city incurred additional costs related to the audit for work that was necessary to correct the problems.
"The reconciliation function is crucial to assist management in detecting misstatements whether due to error or fraud that otherwise may go undetected," the auditor said. "As a result of the review of financial records, we made dozens of journal entries to assist with the financial statement close for the audit. That number does not include the many journal entries recorded by the new city treasurer during the process of cleaning up the erroneous bank reconciliation."
Anderson, Tackman & Company recommended that all bank accounts be reconciled on a monthly basis.
The next material weakness discussed was the financial reporting package.
According to the audit report, financial information was being presented to the city council that was not accurate due to the bank reconciliation issues.
"When erroneous financial information is presented to the city council, the decisions that are made by the board may be different than what would have been made had the board received the appropriate information," the audit finding stated.
The auditing firm recommended that, in addition to the timely reconciliation of bank accounts, and once the city's books are cleaned up and information from the city's accounting software can be relied on, that software should be used for generating as much of the financial information as possible to reduce the risk of mathematical errors.
"During the monthly council meetings it is recommended that the council review and approve a listing of all disbursements, including electronic payments and the tax collection fund," the report said. "Approval should be noted in the meeting minutes. Furthermore, the council should be presented a balance sheet information along with budget-to-actual information for each of the city's funds."
The last material weakness discussed dealt with how property tax revenue was distributed among city accounts.
According to Michigan law, the city is responsible for collecting property taxes levied by other jurisdictions, including Marquette County, Ishpeming Public Schools and the Downtown Development Authority.
Summer taxes are collected July 1 through Sept. 14 without penalty. Winter taxes are collected Dec. 1 through Feb. 14 without penalty.
During the year, between July and December, the city made tax disbursements on Sept. 15 and Dec. 1, according to the audit report.
"Furthermore, reconciliations of collections and disbursements were not being performed timely, if at all," the report said.
This was due to the long-time city treasurer resigning in May 2022, according to the audit report. The turnover of the city treasurer and other key positions led to a breakdown of internal control procedures.
Additionally, there was a lack of appropriate supervision, the report said.
Due to this, the city is not in compliance with state statute.
"Additionally, the city will not have a clean qualifying statement (to the Michigan Department of Treasury) and will be required to go through additional procedures in order to issue debt," the report said. "Related to other jurisdictions, such as school districts, property taxes are a main source of revenue providing funding for meeting obligations such as payroll. Timely tax distributions are a vital part of cash flow for many of these jurisdictions."
The auditor's recommendation was that the city utilize the Michigan Accounting Procedures Manual for Local Units of Government in Michigan issued by the state for appropriate procedures and required documentation.
The auditing firm also suggested that city staff should get assistance through training sessions provided by the Michigan Municipal Treasurers Association.
"Reconciliation procedures should be developed and maintained for the checking and savings accounts and collections and distributions," the report said. "Management and governance should be made aware of the requirements related to property taxes and take responsibility for complying with state statute. Property tax collections and distributions should be reported to the city council with the monthly financial reporting and the city council should approve the tax distributions and approval should be noted in the meeting minutes."
The audit also presented significant deficiencies.
The auditing firm discovered several transactions in which the amount paid did not agree to the invoice amount or the same invoice was paid multiple times and was not detected until months later.
As a result, the city could overpay for services or pay for items that were never received.
Key staff turnover and the implementation of new accounting software, in 2020, led to a "breakdown of internal control procedures."
The auditing firm recommended that the city develop and implement a system of approval.
"All individuals given the authority to approve disbursement need to be informed of their role in the internal control structure," the firm said.
The last area of concern discussed at the audit presentation was expenditures over appropriations.
Michigan law states that "local governmental units shall not incur expenditures in excess of the amount appropriated."
In other words, in order to spend more than what was budgeted for goods or services, city council would need to approve a budget amendment.
"During the year ended Dec. 31, 2022, the city incurred functional expenditures which were in excess of the amounts appropriated as enumerated upon in the notes to the financial statements," the report said.
The auditor said the budget was not amended "based on the level of expenditure," resulting in the city not being compliant with state law.
He recommended the city strictly control expenditures and to not exceed the original appropriation. When it isn't possible, the budget should be amended accordingly.
Moving forward, the city plans to take action to address the concerns that Grentz highlighted, including enhanced staffing expertise, financial reporting to city council, ongoing training and development for all employees working in the city's finance department, and strengthen internal controls related to budgets and banking, including bank account reconciliations and more sophisticated invoice processing.
"I think Grant (Getschow) is the person to be here now, he just needs time to get things going forward," Grentz said.
Although the city's audit showed concerns, it also showed several areas of strength:
≤ The net position for the city as a whole increased by $853,432 as a result of this year's operations. Net position of business-type activities increased by $372,692, or 2%, and net position of the city's governmental activities increased by $480,740, or almost 4%.
≤ During the year, the city had expenses for governmental activities that were $5.2 million and generated nearly $5.5 million in general revenues and other program sources.
≤ The city's business-type activities had expenses of $4.7 million and generated $5.3 million in revenues.
≤ The general fund reported a net change in fund balance of $103,583; initial projections predicted a decrease of nearly $100,000.
To watch the audit presentation, visit youtube.com/@cityofishpemingmi987.
Dreyma Beronja can be reached at 906-228-2500 ext. 548. Their email address is dberonj@miningjournal.net.