Restatement of 1986 Equities

The accounting personnel and systems present before the issuance of the judgment bonds continued through the Receiver's appointment. While Ecorse acquired certain computer hardware and software in March 1986, it had little or no affect on improving the timeliness or accuracy of the financial information.

The 1987 financial statement audit discovered the following errors as of June 30, 1986 in the General Fund, Water and Sewer Fund, and Police and Fire Pension Plan (among other funds) equity (in thousands):

   

As Presented

 

Corrections

 

Revised

             

General Fund (deficit)

 

$(4,586)

 

 

 

 

Water and Sewer judgment

 

 

 

 

 

 

bond proceeds

 

 

 

$1,793

 

 

Property taxes - net

 

 

 

$189

 

 

Special revenue fund deficit

 

 

 

$(18)

 

 

Overstatement of Pension

 

 

 

 

 

 

contribution

 

 

 

$675

 

 

Other

 

 

 

$(27)

 

$(1,974)

 

 

 

 

 

 

 

Water and Sewer Fund

 

 

 

 

 

 

surplus

 

$2,898

 

 

 

 

Judgment bond proceeds

 

 

 

$(1,793)

 

 

Overstatement of accounts

 

 

 

 

 

 

receivable

 

 

 

$(397)

 

 

Sewer debt misclassified

 

 

 

$(575)

 

 

Deficit misclassified

 

 

 

$(89)

 

$44

 

 

 

 

 

 

 

Police and Fire Pension Plan

 

 

 

 

 

 

surplus

 

$5,417

 

 

 

 

 

 

 

 

 

 

 

Pension contribution

 

 

$(675)

 

$4,742

COMBINED

 

$3,729

 

$(917)

 

$2,812

The corrections to the 1986 audited financial statements are important to understand as the financial information available to Judge Dunn at the time the receivership decision was made was based, in part, on the draft financial statements arising from the 1986 audit.

The correction to the 1986 financial information did not arise until six months into the receivership. Thus, the apparent General Fund deficit at June 30, 1986 was $4,586,000, when in fact the actual deficit was $1,974,000, a net difference of $2,612,000. However, the three principal operating funds' equities were collectively overstated by $917,000.

In addition, the uncorrected 1986 audited financial statements were used by the Receiver in the first six months of the receivership. No other credible financial information was prepared until the 1987 audited financial statements were completed in August, 1987.

The errors, which have been corrected in the Appendices, are described as follows:

  • The 1986 financial statements reflected the judgment bond proceeds as increasing the equity of the Water and Sewer Fund. The General Fund had borrowed the cash from Fund, but this transaction did not have any impact on the Water and Sewer Fund's operations. The bond proceeds arose because of the General Fund's operating losses.

  • There were numerous errors applicable to property taxes including amounts recorded in the wrong funds, wrong basis of accounting used, and other errors.

  • A Special Revenue Fund had a deficit of approximately $18,000. This fund did not have any operations for several years prior to the receivership.

  • Most of the 1986 Pension Plan contribution was funded through the judgment bond proceeds. Yet, a second adjusting entry was recorded just prior to the preparation of the 1986 financial statements resulting in doubling the pension contribution for 1986.

  • A clerical error was made in the calculation of the unbilled accounts receivable for the Water and Sewer Fund as of June 30, 1986 resulting in an overstatement of revenues of $397,000.

  • At the time that Ecorse decided to levy certain general obligation debt associated with the Glenwood sewer project (as recommended in the Financial Recovery Plan), the debt was removed from the Water and Sewer Fund. The proper presentation was to reflect the debt in the Water and Sewer Fund, as well as any subsequently issued property tax levies.

IRC 457 Deferred Compensation Plan

No mention of the Deferred Compensation Plan was made in the 1986 audited financial statements. The assets and related liability, which are estimated to be $250,000 at June 30, 1986, have been withheld from employee wages and deposited with an outside investment agent. However, these assets remain the property of Ecorse until such time as the employee is entitled to withdraw the amounts (generally at retirement). Given Ecorse's uncertain financial future, the omission of these assets understated the amounts available to creditors in the event of a bankruptcy proceeding.