A resident’s concerns regarding the recently concluded City of Powell River audit were addressed by councillors at the city’s committee of the whole meeting on September 1.
In a letter to council, resident Pat Martin stated that a review of the city’s audit results and communications final report raised some concerns. She pointed to a statement in the report that stated: “management is in a unique position to perpetrate fraud because of the ability to directly or indirectly manipulate accounting records, and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively.”
“The use of the word unique leads me to believe that it is not common practice in all cities for management to have the ability to override financial controls,” stated Martin. “Is there a valid reason our city operates like this? Although the 2019 audit found no issues, it seems to me that some remedial measures may be in order.
“Can the city explain the reason management is allowed to override controls, and if there is no good reason, will council make a resolution to correct this?”
Chief financial officer Adam Langenmaier said looking at the letter, it states that management is in a unique position to perpetuate fraud because of the ability to directly or indirectly manipulate accounting records.
“This is a risk identified by auditors,” said Langenmaier. “In the audit findings you see how the outcome of the risk assessment was done. They tested journal entries and records and found there was no evidence of this occurring. This type of wording here is standard across all audits.”
Langenmaier said auditors always look at management or those who have the ability to make decisions and control. They are the ones tasked with that responsibility of doing the right thing, he said. He added that they are the ones who make sure processes are followed.
“The question here is: Is there a valid reason why the city operates like this,” said Langenmaier. “All organizations have to have some sort of risk. You can’t have a system where there is no risk because otherwise nothing would get done. If you want to do nothing you have no risk, but to be able to have the staff do the work, you have managers managing them.
“There are controls in place to prevent all of these issues the auditors are identifying that exist in the world. The best place to find how the city has done with those systems is in the audit findings.”
Langenmaier said when certain words in the audit report are read, it can sound like there is something going on. He said when one continues reading the report, it’s seen that there are prevention measures, tests and no issues found.
Councillor Rob Southcott said to be absolutely clear, Langenmaier was saying the risk is systemic, not specific to a particular administration. Langenmaier said that is correct.
“You see this on lots of audit reports,” added Langenmaier.
Councillor George Doubt said he read the letter and went back to the documents being talked about. He said the language in the letter came from the audit final report to the city.
“They have to review the risks the city is under financially,” said Doubt. “I’ve seen a number of audits and this is the most thorough review of risk I’ve seen.”
He said it was part of a three-column table. The first identifies the risk and management override of internal controls, which they note is a mandatory audit risk.
“That means it’s mandatory for auditors who are doing a generally accepted accounting principle audit to review this kind of management override of internal controls risk,” said Doubt. “They define in the next paragraph that management is in the unique position to perpetrate fraud. That’s the risk they have to identify.
“The next line over they determine what they found in their audit in going through the books and doing all of the testing.”
Doubt said the auditor tested the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statement and all audit testing in this area was executed as planned.
“No issues were noted,” said Doubt. “That’s as good as you can get. The fact that we have a thorough analysis of the risks is important.”
Doubt said he’s since looked at other municipal audits, which were audits by different auditors, with the same issues in their management responsibilities, pointing out they have looked at the internal controls.
“Staff is doing a good job,” said Doubt. “I pay attention when I’m talking to the chief administrative officer and the chief financial officer, that they are continually updating themselves, going to conferences and seminars, making sure they understand proper governance.
“The audit report is a clean one and I don’t think citizens need to be concerned. We are doing what other municipalities do.”
Councillor Cindy Elliott said what she thinks is in place is a difference in interpretation. She said she thinks the proper interpretation of unique in this context is that this particular risk is unique to management as opposed to any other level.
“I think Ms. Martin has erred in her interpretation of it being unique to our city,” said Elliott. “I am comfortable with our audit and I’m comfortable that we have a clean system going forward. I appreciate everybody coming forward and letting us know when they are worried so we can address it.”
