MICHIGAN CITY — City Controller Rich Murphy found himself in the hot seat as the Michigan City Common Council picked apart the findings of the city’s annual audit by the Indiana State Board of Accounts last week.
The term that was audited began Jan. 1, 2018 and ended Dec. 31, 2018.
“In our opinion, the financial statement referred to above presents fairly in all material respects the financial position and results of operations of the City of Michigan City for the year ended Dec. 31, 2018, in accordance with the financial reporting provisions of the State of Indiana State Board of Accounts,” Murphy read from the document.
He noted he’s been the city controller throughout three audits, and the process and outcome have been similar each time: The auditors make comments in the report about improvements that can be made to the city’s internal controls; the city proposes plans to resolve them; the auditors accept those plans; and the city implements them.
“The smart cities – and we like to think we’re in this category – look at these comments as a learning opportunity to improve our procedures,” Murphy said. “We take them seriously; we propose corrective action plans; and we move on, as we have the important job of running the city.”
But his summary wasn’t enough for some council members.
“I’m disappointed with that,” said Council President Don Przybylinski, who worked in finance at U.S. Steel for almost 40 years. “I’ve been through audits where I used to work. To me this is not a good report. I’m not impressed by, ‘There were findings; there were corrective actions; we’re done.’”
Przybylinski read a specific finding from within the 2018 audit, and noted it was repeated from the state’s 2017 audit:
“There were several deficiencies in the internal control system of the city related to financial transactions and reporting. There was a lack of segregation of duties, as the city had not separated incompatible duties related to cash, investments, receipts, disbursements and financial reporting.
“The city and sanitary district each had employees who were responsible for ensuring that their respective ledgers were reconciled with the bank depository balances. Effective controls were not in place to ensure that the depository reconcilements were performed accurately and timely. Reconcilements for 2018 were unperformed as of June 5, 2019.”
Murphy confirmed the issue was resolved on June 20, but Przybylinski expressed displeasure with the six-month lag.
The controller said that prior to the audit, no mechanism was in place whereby those reconcilements could have been made in a timely fashion online, as the city was in the process of converting to new financial software.
“Companies put in new systems every day,” Przybylinski said. “But they also make sure that the work that needs to be done is being done so that you don’t fall behind if you do have an audit. To me, putting in a new system isn’t an excuse.”
“It’s not an excuse,” Murphy responded, “it’s just a fact. It’s a once-in-a-generation experience to go through a total financial software conversion. That is a lot of the reason we fell behind on reconciliations. All I can say is that it’s been resolved. We try not to look backwards; we want to look forwards.”
Przybylinski noted the city’s records were $60,000 off-balance from the findings of the State Board of Accounts.
Murphy confirmed this was true, but said it wasn’t deemed a material finding in relation to the city’s $50 million budget.
Second Ward Councilman Paul Przybylinski also read a comment from the report:
“‘As a result of a lack of effective controls, electronic funding transfers totaling $173,000 deposited in 2018 were not recorded in the city Sanitary District ledgers as of July 2019.’ I think that’s a serious infraction,” he said.
“‘The city disbursed funds through electronic payments and posted the transactions via a journal entry. These payments were not approved by the fiscal officer or appropriate governing board at a public meeting.’ That’s a serious finding also. So, I’m not taking this lightly, and I don’t think anybody should.
“Mr. Murphy, you keep saying we got a ‘clean’ audit, but there’s a lot of stuff in here. I think we could probably go on to midnight picking through this audit.”
But Murphy disagreed.
“It’s not a serious infraction; it wasn’t improper,” he said. “But the documentation, the technical review step was not made. That’s what the internal controls issue is. That’s what a lot of this report is. … You listen, you take them seriously, and you propose corrective action plans. That’s what we’ve done.”
First Ward Councilman Bryant Dabney, who works in finance for the School City of East Chicago, offered his thoughts on the report as well.
“We need to seriously look at anywhere where someone is creating a process and approving it,” he said. “That needs to be immediately taken care of. That will get you in a lot of trouble. Do we have somebody that’s going to be up on the bank statements on a monthly basis?”
Murphy confirmed that his office has been cross-training throughout the year so multiple employees are able to process payroll and reconciliations. And he said that although the state could come in at anytime to verify what corrective actions the city has taken, it typically waits to address that until the next year’s audit.
“I hope we don’t come across another report with these types of findings,” Dabney said.
Fourth Ward Councilman Sean Fitzpatrick questioned why the council wasn’t made aware when the report was posted; and Don Przybylinski echoed that question, wondering why he only learned of its release when a citizen read the report during a live video posted on Facebook.
Murphy said the city was informed in September that once the document was certified, there was no further action to be made on the city’s part. Beyond that, he was not informed of a release date.
“I want to make it very clear that you cannot get this unqualified opinion, this clean opinion if all funds are not accounted for,” Murphy said. “You cannot get this unqualified, this clean opinion if there is any concern of missing money.
“So, I just want to put that to bed contrary to, I’m told, social media reports that may have reflected otherwise. This audit confirms that all funds are accounted for, and there is no missing money. This is what is referred to as the ‘clean’ opinion, and anyone that says otherwise is wrong.”
Sixth Ward Councilman Gene Simmons asked whether the controller’s records reflected on Gateway, the public access site, were accurate and up-to-date; and Murphy confirmed they were as of the Oct. 1.
Anyone who wishes to view the State Board of Accounts’ audit in full may do so at secure.in.gov/apps/sboa/audit-reports/#/.