Audit of City of Philadelphia's Finances Reveals $923 Million in Errors, $33 Million Discrepancy from Cash Accounts

By:
Chris Gaetano
Published Date:
Jun 13, 2018
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The Philadelphia city controller has blasted the municipal government after an audit found $923 million worth of accounting errors, as well as an additional $33 million variance between the city's books and bank balances, according to a recent report

For example, the controller said that there were $338.6 million worth of misstatements in budgeted amounts reported on the budgetary comparison schedules, $127.7 million of misclassification errors between revenue categories on the Aviation Fund financial statements and $97.7 million overstatement of the governmental activities' net position restricted for capital projects because the financial statements contained the prior year balance for this account.

For this situation, the controller blamed inadequate internal controls, something that the Office of the Controller had  warned about in the 11 previous reports as well. The controller said that, since fiscal year 2000, the number of accountants in the finance office has declined by 27 percent. These ongoing staff shortages, as well as recent turnover in the accounting division, has compromised the ability of management to perform adequate reviews of financial statements.

Further, the controller noted that the department does not have a comprehensive financial reporting system for preparing the Comprehensive Annual Financial Report, and for capital asset management. Instead, said the report, the city uses a combination of files from Excel, Word and LOTUS 1-2-3 (which hasn't been supported since 2014).

In addition, the controller noted that tax adjustments are not reviewed by the Revenue Department accountants, and that numerous Revenue Department staff members have the ability to post payment and receivable adjustments directly to taxpayer accounts on its computerized accounting system. It notes that, while employees do have maximum amounts that they can adjust, these maximums are very high—auditors have observed dollar limits as high as $1 million for nonsupervisory personnel and $100 million for supervisory personnel. While auditors did not find evidence of improper or inaccurate activity, it said this system makes taxpayer accounts at higher risk for undetected errors and irregularities, as well as an increased risk for revenue losses and reporting errors. 

The controller said the city should either hire more accountants or invest in a new financial reporting system that will reduce the labor-intensive procedures needed to prepare the city's financial report. Further, it said management should provide adequate training for new hires and employees performing new duties. There was a recommendation that the city design or purchase a computerized asset management system. Finally, to address the lax monitoring of adjustments to taxpayer accounts, the Revenue Department should require independent supervisory personnel review for the daily adjustment reports so as to check for irregular activity. 

And then there's the missing $33 million. The report said that the Treasurer's Office did not properly reconcile the city's primary depository account during fiscal years 2015 to 2017, which resulted in the $33 million difference between book and bank figures. While the original figure was $40 million, the treasurer was able to identify $6.8 million of this discrepancy. However, as of April, the Treasurer's Office has hired an outside accounting firm to assist with investigating the remaining unknown variance. Still, the failure to properly reconcile the accounts, said the report, means there is the possibility that significant errors and fraud in this account may have gone undetected. 

The controller said the city needs more resources to perform proper, complete and timely reconciliations, and all bank reconciliations should be brought up to date, along with moving forward with the plan to get an outside firm to assist. The city should also formalize the reconciliation process for the consolidated cash account in writing. 

The city, for its part, generally acknowledged the problems brought up and, in many cases, said it was already on its way to fixing them, but noted that that it is constrained by resources in certain areas. 

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