The city of Elizabeth City’s failure to submit its 2021-22 financial audit on time to the Local Government Commission is among the six material weaknesses identified in an independent auditor’s report.
Despite those weaknesses, the audit received an unmodified or “clean” opinion, according to an accountant from the accounting firm PB Mares. An unmodified opinion or “clean” is the highest level of assurance awarded to an audit and shows the auditor’s confidence that the city’s financial statements fairly present its financial results, financial position and cash flows.
The city’s 2021-22 audit was due to the LGC in October 2022 but was not received until earlier this month. North Carolina state law demands that municipal governments have their accounts audited annually and present their audit report to the LGC four months from the end of the fiscal year, which was June 30, 2022.
Robert Bittner III, an accountant for PB Mares, presented the audit’s findings at Monday night’s meeting of the City Council. In his presentation, Bittner described a material weakness as “a significant deficiency or combination of significant deficiencies in internal control such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected and corrected on a timely basis.”
Bittner said six material weaknesses may sound terrible but compared to the previous year’s audit, when 13 were identified, the city is “definitely trending in the right direction.”
The PB Mares report cites staff turnover as a cause for half of the material weaknesses identified. In addition to staff turnover, the report also cites a “lack of staff with skills, knowledge and experience in local government accounting” as a reason for the late audit.
The second significant deficiency was related to “unrecorded debt” that was found in a grant agreement between the city and the N.C. Division of Water Infrastructure, Bittner said.
“In this situation the city received a grant, but that also included a debt piece,” he said. “Instead of recording the debt, the portion of the debt that should have been recorded as debt, the city recorded the entire thing as revenue.”
The report cited “insufficient review and reconciliation of accounts” by city staff as a contributing cause.
Bittner used the word “interesting” to describe the third violation, which had to do with accounts receivable and revenues.
“This one’s interesting,” he said. “These were items that we identified through sales tax and ABC revenues that were either not recorded properly, but in the case of ABC revenues they hadn’t paid you their true up for a couple of years.”
The result was the city was owed an unrecorded amount of $209,042 The city has since collected that revenue, according to City Manager Montré Freeman.
The fourth violation was specific to the city’s water department and state procurement guidelines. According to Bittner, the city was unable to provide auditors the necessary documents showing it had complied with the state’s procurement process.
“These were items that require what we would say, they’re not the official bids, but the unofficial bidding process where you get three solicited bids,” Bittner said. “We could not receive evidence that those had been solicited.”
The fifth significant deficiency was identified as an over expenditure of the city budget.
“The city expended more than appropriated in the annual budget ordinances and capital project ordinances,” Bittner said. “There were multiple different funds and different facets in which the budget was overspent throughout the year.”
The over expenditures amounted to more than $1.8 million, according to the audit report. They included $200,131 in the general fund non-departmental funds; $1,072,265 in the Aviation Commerce Park grant fund; $31,971 in the Coast Guard Grant fund; $19,263 in the Parkview Sewer Project fund; $46,324 in the Raw Water Transmission Project fund; $2,031 in the Electric Fund data processing department; $372,179 in the Electric Fund other expenses department; and $90,337 in Electric Fund Capital Outlay.
According to Bittner, one cause for the discrepancy was a lack of oversight when signing off on purchasing orders.
The final material weakness had to do with how the city reconciles it spending on a monthly basis.
“The city did not make the appropriate journal entries in the general ledger in order to balance the completed bank reconciliation in a timely manner,” Bittner said.
For the fiscal 2021-22 year, the city received the bulk of its revenue, or 41.8%, from property tax revenues. More than half of the city’s expenditures — or 52% — went to public safety, according to Bittner.
The city’s general fund balance shrank in 2020 due to COVID but has since rebounded. The balance dipped from $7.6 million in 2019 to $6.2 million in 2020 and rose slightly to $6.7 million in 2021. It grew to $7.8 million in 2022.
Bittner concluded his presentation by summarizing the latest audit report.
“I think it’s clear that there’s been some improvement just by the sheer fact that you went from 13 findings to six in one year,” he told council. “Which also if you recall a lot of the information, I would say is stale. I mean we’re looking back in time.
“By the time we were able to notify you of 2021’s issues through the course of the audit, 2022’s timeframe had already come and gone,” he said.
Bittner said that based on his conversations with Freeman and the actions taken to correct the audit findings the deficiencies have been resolved.
“But I have to caution you again,” Bitner said. “We’re in an arrears situation. These could still be things that are of course found, but when you are in arrears like that the likelihood of finding more is higher just simply because there hasn’t been the time to correct those things in place.”
He said he anticipates the 2022-23 audit process to go much smoother but it won’t be submitted on time either because that audit was due last November. The city’s audit for the current fiscal year, 2023-24, is also due Oct. 31.
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