Bookkeeping for Harlan County's fiscal court was so poor in 2012 that state auditors couldn't verify the accuracy of the county's financial statements.
In one example, the county's financial report for the fourth quarter didn't square with its bank statements by $3.9 million, according to a report released this week by state Auditor Adam Edelen's office.
Because of the weaknesses in accounting, "the fraud risk exists for an individual to manipulate, misappropriate" or misdirect taxpayers' money, the audit said.
The audit found so many problems that it prompted a "disclaimed" opinion, meaning auditors couldn't conclude that the county's financial statements accurately showed its financial activity.
However, Edelen's office didn't refer the audit to law-enforcement agencies, which it routinely does with audits that raise suspicion about potential criminal activity.
"The main thing is there is no money missing. It's just bad bookkeeping," Harlan County Judge-Executive Joe Grieshop said Tuesday.
Grieshop said he had been aware of problems with the county's bookkeeping and the treasurer — identified in the audit as Ryan Creech — even before the audit but didn't know how to fix them.
He said he welcomed the findings because the report will help the county improve.
"Tough audits aren't a bad thing," said Grieshop, a Democrat who is not seeking re-election.
Grieshop said the county has made changes to address some problems identified in the audit and will make other improvements.
The audit covered the fiscal year ending June 30, 2012.
One finding was that the fiscal court lacked proper control of the "overall environment" of the county, with poor controls over receipts, cash transfers and bank reconciliations, payroll and spending.
The county didn't monitor accounts by various types of funds or review restrictions that might control how some money could be spent, such as federal grants.
The county also didn't submit timely quarterly reports to the state Department for Local Government, and the treasurer did not keep accurate ledgers, the audit said.
Other findings included:
■ The county absorbed a $176,000 debt of the local industrial-development authority without fiscal court approval.
■ The county made lease payments without agreements in place. In one case, the county owned property that could be reached only by a road that was in private hands, and it was paying the landowner $500 a month, without a written agreement, for access to the county land.
■ The fiscal court was not withholding the proper franchise fee on garbage collection, meaning it was missing out on much-needed revenue.
■ Auditors couldn't determine whether the county sought bids as required on at least 25 purchases of $20,000 or more.
■ The county paid more than the fiscal court approved for heating and air-conditioning work for a center for at-risk teens called the Appalachian ChalleNGe Academy, which is run by the National Guard.
In another case, the fiscal court did approve adding $24,000 for the cost of electrical work at the academy, but it spent $45,006.
■ The county paid $29,925 more than the approved bid for a salt-storage structure. Grieshop, the county engineer and the contractor signed the change order, but there was no documentation that the fiscal court approved the payment.
"Without fiscal court approval of the project costs in total or approval of change orders, the risk for waste, fraud or abuse is increased," the audit said.
The audit also said the county should review the county engineer's position to make sure no conflict of interest exists.
The engineer, Leo Miller, does engineering work for the county but also operates his own engineering firm locally.
In the 2011-12 fiscal year, the county paid Miller $45,862 under the ledger entry of "county engineer" and paid his firm $735,509, the audit said.
Auditors were unable to figure out what work Miller performed as county engineer and as an independent contractor.
Grieshop said in his response to the audit that Miller has long performed valuable work for the county and that there's no indication of fraud, waste or abuse on his part.
However, he said the county would set up separate contracts to outline Miller's work as county road engineer and as an independent consulting engineer.