Accounting Personnel and Systems

The need for accurate and timely financial information is a critical need long recognized in the commercial sector. Yet, in many instances, the need for this same financial information in the governmental sector is not given the priority it deserves. In this case, Ecorse was no exception.

Despite representing one of the more critical administrative deficiencies existing at Ecorse in the early to mid-1980s, there was no mention of the matter in the Financial Recovery Plan. In addition, the outside auditors did not provide sufficient discussion in their reports covering internal accounting and administrative controls to enable City Council, grantors and the State Department of Treasury to fully understand the depth of the accounting record deficiencies. Essentially, the financial records were in shambles and no internal actions were taken to correct the problem.

At the time of the receivership, the City Controller had no formal training in accounting and relied heavily on the outside auditors to fulfill the role of both accountants and auditors. The use of outside auditors was costly both in additional fees and limiting Ecorse management's ability to identify operating issues and budget short-falls as they arose.

Routine accounting tasks are the responsibility of a properly functioning accounting department. Examples of these tasks, which were performed by the outside auditors and billed as an incremental cost, follow:

  • Reconciliation of the then 35 bank accounts (several of which were not recorded on the general ledger), interfund transactions, and other account detail to the general ledger control accounts.

  • Cash receipts were generally recorded in one of three funds (General, Current Tax Collection, or Water and Sewer Funds) during the year by Ecorse personnel. After year end, these transactions would be analyzed by outside auditors and distributed to their appropriate funds and accounts. This process involved a substantial amount of duplicative effort.

  • Preparation of analyses of general ledger accounts, including: accounts payable, property taxes, accounts receivable and others.

  • Preparation of several hundred adjusting entries to close the accounting records after year end.

  • Preparation of Ecorse's financial statements.

To identify a sense of the costs associated with the accounting assistance in routine management tasks provided by the outside auditors, an article in the local newspaper in fiscal 1986 indicated the following comparisons of fees paid to outside auditors among many downriver communities for the 1985 fiscal year:

Ecorse

$90,000+

River Rouge

47,550

Taylor

38,500

Lincoln Park

29,300

Allen Park

17,500

Wyandotte

18,500

Southgate

25,000

Melvindale

14,000

The newspaper article did not specifically cite the actual costs paid to Ecorse's outside auditors. Rather, it referenced that the fees exceeded $90,000. It is likely that this amount excludes the Water and Sewer Fund and Building Authority Fund fees which were normally billed separately. In 1986, these separately billed fees were $35,000 and $7,500, respectively.

A review of the auditor's workpapers engaged for the 1986 audit of Ecorse's financial statements and accounting assistance reflected total hours incurred of approximately 3,800 and total fees of over $148,500.

In addition to the substantial "audit" fees above, Ecorse's audited financial statements were often issued six months or more after year end. By the time that Ecorse management, including Council, was informed that they had a deficit for the prior year, Ecorse was a full six months or more into the next fiscal year.

Thus, the ability to mitigate the accumulating deficits was, in part, attributed to the inability of the Accounting Department to account for Ecorse's operations on a timely basis.

The lack of an on-site skilled accountant created a void in the ability to analyze routine and critical financial transactions. One of the most critical events surrounding a governmental unit is the need for a proper analysis of potential labor alternatives during the negotiation of contracts. Failure to properly identify the financial status and impact of proposals on Ecorse's operations also contributed to the fiscal distress.

In addition to the need to properly analyze labor proposals during negotiations, poor accounting practices can and did manifest themselves in various losses, including:

  • Grant disallowances – Ecorse failed to properly bid certain contracts in 1985 which resulted in disallowed costs paid back to the grantor of $13,062. At the inception of the receivership, over $19,000 of unsubstantiated costs were also not billable to the grantor and were charged to the General Fund. Other failures to comply with grant provisions resulted in the withholding of grants until such time as Ecorse was able to demonstrate compliance to the grantor.

  • Cash flow analysis – The number of bank accounts, failure to properly record all cash transactions and reliance on outside auditors in the performance of bank reconciliations resulted in the inability to accurately project cash flow needs and maximize investment opportunities.

  • Bank reconciliations – At the inception of the receivership, there were unlocated differences of almost $8,000 in the general bank account and almost $19,000 in the payroll accounts. Fortunately, the bank balances exceeded the recorded book balances and these differences resulted in "gains".

  • Improper use of restricted assets – The Major and Local Streets Funds' cash was used to fund the operations of the General Fund. In addition, Water and Sewer Fund cash was also used. Ultimately, the General Fund was required to return these borrowed funds. While no loss of principal resulted, the Major and Local Streets Funds were unable to accomplish their primary objective of street maintenance. The Water and Sewer Fund deferred repairs and maintenance and similar efforts. Finally, none of these Funds received the investment income on the otherwise idle cash they would have had to invest.

  • Budget – Throughout the early 1980s, Ecorse's Council passed balanced budgets for its General Fund, but failed to adjust its actual operations to reflect the level of funding. It is presently difficult to determine what actions would have been taken by the Mayor and Council had proper financial information been presented for action. However, the annual financial statements, once received, clearly demonstrated over-expenditures against the budget. The Mayor and Council were not given the opportunity to take action on budget over-runs as timely budget to actual comparisons were not prepared on an interim basis.

  • Sick and vacation Day obligations – The sick and vacation pay obligation, which was $1,367,420 at June 30, 1986, was based upon various departmentally maintained manual accounting records. The accuracy of these records, which were used as a basis for the final payouts upon employee termination, was suspect.

26th District Court

The 26th District Court cash receipts and disbursements were not recorded in Ecorse's computerized general ledger. Rather, a manual cash receipts and disbursements journal was maintained. Often, fines were paid in cash as many residents and others did not have personal checking accounts. Examples of accounting system deficiencies follow:

  • There was no listing of amounts owing to individuals who had posted cash bonds. As a result, it was difficult, if not impossible, to determine whether the separate bank account maintained for these transactions had the appropriate amount of cash. In addition, the return of cash held may not have been the same as the amounts posted as bail.

  • The condition of the manual records inhibited the preparation of bank reconciliations. The bank reconciliations were generally prepared by the outside auditors on an annual basis several months after year end.

  • There was no attempt to identify parking and moving violation ticket numbers to ensure that all cash receipts were deposited and those tickets not paid properly pursued.

  • Deposits were not made intact, nor on a timely basis.

  • No efforts were expended in attempting to provide appropriate segregation of duties to ensure that errors and / or irregularities would be detected by management.

  • Distributions for fines collected were not made to the State or Ecorse for months after collection, despite Ecorse's cash flow pressures.

Nepotism

Finally, many of the positions involving accounting and related activities were filled with relatives. At the time of the receivership, the following examples are cited:

  • Treasurer's Office – The Treasurer was the son of the Deputy Treasurer. In addition, the Cashier was the sister to the Treasurer.

  • Accounting Department – Included within the four person Department were a mother and daughter.

  • Assessor's Office – The Assessor was the son of the Deputy Assessor (mother).

Generally, these functions are incompatible in an internal control system and should not be filled with relatives as the ability to detect errors and / or irregularities is diminished, if not totally eliminated. Other examples of nepotism existed in Ecorse, however, it did not involve accounting functions.