Tuesday, April 2, 2024

ACFR: "There's No Fraud"

Source: DALL-E

For city finance wonks, Christmas comes twice a year: once in August when the City's budget is set and again when the City's annual comprehensive financial audit (ACFR) is published. The budget specifies the city's cash flow (its planned revenues and expenses). The financial audit details the city's assets (the value of city property, bank accounts, etc.) and its liabilities (outstanding debt, pension obligations, etc.).

For Councilmember Joe Corcoran, the chair of the City Council's Audit Committee, what "really stands out" about this year's ACFR , is that "there's no fraud." That's a conclusion that the auditor was careful not to make. It's not the purpose of a financial audit to detect fraud. At best, a financial audit checks that there are controls in place to deter fraud, not catch it. Unfortunately, with Corcoran's overstatement, the City has an elected official's imprimatur that "there's no fraud." I take no assurance when elected officials act more like cheerleaders for the City than like representatives of the public interest in holding City officials accountable.

It might be instructive to compare this audit to the City's own internal investigation of a complaint against former Mayor Laura (Maczka) Jordan's misconduct in the Palisades development. That investigation found no ethics violation. Like financial audits, that investigation also wasn't a criminal investigation, a fact that the City, in its own defense, highlighted when the former mayor was later indicted for bribery and tax fraud. Not that I'm alleging there's any evidence of fraud here, but claiming "there's no fraud" after a simple financial audit sounds a bit too much like the City claiming "no ethics violation" after its own self-interested investigation into former Mayor (Maczka) Jordan's misconduct. Coincidentally, former Mayor (Maczka) Jordan was just ordered to surrender to the Federal Bureau of Prisons no later than April 8 to begin serving her prison sentence.

Back to the audit...last year's ACFR identified two instances of "material weakness" in the City's "internal control over financial reporting." The good news is that both weaknesses reportedly have been addressed this year. The bad news is that the audit committee seems to have spent all of its time focused on those two issues and none on the other 162 pages of the auditor's report. For the full City Council, the time spent on this agenda item, including the time taken by the external auditor to introduce it, was just thirteen minutes. Remember, last year the full Council spent almost three times that deliberating one lone woman's request to open a massage business. The amount of time City Council spends deliberating an issue is inversely proportional to how much time should be needed to get to the bottom of it.

Net Position

Now a brief look at the bottom line, something no one on the City Council bothered to talk about at all. According to the audit report:

The Statement of Net Position presents information on all of the City's assets and liabilities, including capital assets and longterm obligations. The difference between the two is reported as net position. Over time, the increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating.

Here's the historic data from which to glean an insight into whether the City's financial position is improving or deteriorating.

Assets and Liabilities (in thousands)
YearAssets Deferred OutflowsDeferred InflowsLiabilitiesNet Position

Note: Cells with "n/a" indicate years before those figures were required to be reported.

Deferred outflows and inflows seem to vary randomly, perhaps due to random timing of random expenditures and revenues with respect to the fiscal year calendar. If so, then there's nothing to see here.

Net Position. Total assets at September 30, 2023 were $1,159.3M, deferred outflows of resources of $62.4M, total liabilities of $741.7M and deferred inflows of resources were approximately $36.5M resulting in a net position balance of $443.5M a 20.3% increase over the previous year.

After peaking in 2007 at $220,951,000, it wasn't until 2020 that Net Position again reached and then exceeded that level. Since then, in just four years, net position has doubled, with a 20.3% increase in just one year. How much of that can be credited to good financial stewardship by the City management and how much to a strong national economy? I believe it's a little of the former and a lot of the latter. Beyond that I'll leave it to readers to argue over.

Liabilities peaked in 2019, then dropped in 2020, then rose again the next two years, and in 2023 reached a new peak. How worried should we be about that, as long as assets are outgrowing liabilities? Dunno. But I wish someone on the City Council had even noticed that and thought it worthy of discussing.

I would feel more assured that there's someone watching the henhouse if the City Council spent more than thirteen minutes on all this, and didn't decide that the highlight was "there's no fraud."

"Watchful eyes are scarce.
Thirteen minutes, a mere glance.
Is henhouse guarded?"

—h/t ChatGPT

1 comment:

Mark Steger said...

A reader asks whether the numbers in that table take inflation into account. They do not. That's important.