A “difficult operating environment” in Irvine because of friction among local officials has played a role in poor financial practices that increased the risk of fraud involving taxpayer money, state Auditor Mike Harmon’s office said in a report released Thursday.
The problems included numerous errors on employee withholdings for federal and state taxes and failure to submit tax payments on time, resulting in almost $18,000 in penalties and interest between 2010 and 2015, according to Harmon’s office.
The city of 2,451 in Estill County even bounced an employee’s payroll check.
Harmon said his office conducted a special examination of the city, covering July 2013 through March 31, because of anonymous complaints to a tip line and a request by Mayor W.J. Noland.
“The conclusion we came away with is the city has a poor operating environment in which actions of the mayor, city clerk and city council members have contributed to numerous questions regarding the city’s finances, personnel practices and other related issues,” Harmon said in a news release. “Ongoing disagreements and confusion over who is responsible for supervision of the city’s operations created a leadership vacuum, allowing financial decisions to be made without proper review or oversight and increasing the opportunity for waste, fraud or abuse to take place.”
Harmon’s office referred findings from the review to Attorney General Andy Beshear’s office, the Internal Revenue Service and the Kentucky Department of Revenue.
The problems it identified included inadequate transfers to the city’s payroll account at times, leading to $3,311 in bank overdraft charges, returned deposits and fees to correct errors, according to a news release.
The review also said city spending wasn’t properly documented at times. Harmon’s office traced 302 transactions from the city’s bank accounts over three years and found that 84 percent lacked needed information, such as invoices or receipts, the report said.
Auditors found $5,090 in petty cash withdrawals with no supporting receipts, Harmon said.
The review also found that the city paid employee bonuses in violation of the state constitution.
A city official said the city once gave cash bonuses but stopped because of a prior audit recommendation. However, the city simply switched to giving out gift cards as bonuses instead, the special review found.
The report said auditors also identified $4,441 in questionable spending for gift cards and gift certificates for employees; meals; and flowers and gifts for employees and elected officials.
“Although these types of purchases are kind gestures, they are of a personal nature and are not reasonable and necessary expenditures to be paid from public funds,” the report from Harmon’s office said.
The report said the disagreements among city management, poor financial management and a lack of clear policies combined to create an environment “that is not conducive to proper management.”
City Clerk Robin Powell and the city council bypassed Mayor Noland’s authority on key decisions, and in many cases, the city was not in compliance with state law and local ordinances on issues such as budget reports, Harmon said.
The release said Powell often performed financial tasks without review by another official.
Disagreements occurred between Noland and the council on authority to hire and fire employees and to hire professional services, such as accounting firms, and the financial information provided to council members was inconsistent and not detailed enough to get a good understanding of the city’s finances, the report said.
Harmon’s office made a number of recommendations for improvement, including developing written financial procedures, asking the Kentucky League of Cities for help in drawing up an administrative code, and improving financial oversight.
Noland said in a response that he was concerned about the findings and would work to make improvements.
There was not a response from Powell in the report, but she told the Herald-Leader that when she took over as city clerk in 2008, she had worked at a bank but had no training in municipal accounting and did make mistakes.
Powell said she has since had training and learned by “trial and error” as she worked to improve her performance. In the city’s most recent audit by an accounting firm, there were only two findings, and one has since been corrected, Powell said.
Powell said she is conscientious and tries to do a good job, but has no help in the complex job of keeping track of city finances.
“There’s never been any fraudulent activity that I’ve done since I’ve been here,” Powell said.
City attorney Rodney G. Davis submitted a response for the council, saying that while disagreements among local officials are common, the friction in Irvine had not resulted in any violations of legal duties by Noland or the council.
Davis said there is no way to legislate a person’s ability to communicate well with co-workers, but council members are prepared to work with Noland to resolve concerns identified in the review.
Davis said the city either already has made changes to correct the concerns included in the report, or will. For instance, it has outsourced payroll functions and put new procedures in place to review bills.
Harmon’s office noted progress, but said the actions described in the council’s response are not sufficient to resolve some of the most serious concerns.
Harmon said problems, such as the lack of documentation for spending, prompted the decision to refer findings to Beshear’s office so officials there could determine whether there has been any criminal activity.
“The amount of missing or incomplete documentation in many areas was concerning enough that we felt it appropriate for law enforcement to take a closer look,” Harmon said.