Audit proceeding in Bethany Beach

Bethany Beach’s annual audit process is getting a major overhaul this year, with both a new auditing firm and a new set of standards to which the town’s books — and those of many other towns — will be held.

The town’s previous auditing firm was not considered for a renewal of its contract for the 2006 fiscal year, with members of the Audit Committee citing communication problems and reluctance on the part of the company’s employees to travel to Bethany Beach for in-person meetings.

After reviewing two bids from companies seeking to replace the former auditors, the Audit Committee had recommended a contract with accounting firm Trice, Geary & Myers (TGM), and that recommendation was accepted by town council members at a Jan. 21 council meeting.

While work on the audit was ongoing May 12 when the committee met with TGM representatives to get a status update, the news so far was heartening for committee members and town officials.

TGM’s Herbert J. Geary III strongly praised the work of Financial Director Janet Connery, noting that she was highly organized and had helped the firm conduct a “paperless” audit that included sending computer files in answer to inquiries from TGM employees.

The strongly computer-based financial records of the town will allow the company to focus on designing tests to examine the town’s financial systems for flaws, rather than spending additional time coordinating mounds of paper records, Geary said.

Some of that time will also be spent converting the town’s financial reports to the newly required Government Accounting Standards Board (GASB) Statement No. 34 system.

GASB 34 is the required format for annual financial reports for small towns as of the 2006 fiscal year. It is essentially identical to standard reports for businesses and is generally viewed as easier to use and compare for both financial examiners and citizens.

Along with Bethany Beach, Selbyville and other small towns were expected to undergo the conversion from old-fashioned municipal financial reports to the GASB 34 system this year. Larger municipalities underwent the shift in previous fiscal years.

Geary stressed to committee members that while a key goal of the auditing process was to assess fraud risk and find any fraud that existed, clients were sometimes too reliant on external auditors in expecting that they would find all incidents of fraud.

A survey of town officials and audit committee members had shown TGM that just such expectations might exist in Bethany Beach, he said. And not even the most expert of auditors is able to find 100 percent of fraud, he warned.

Mayor Jack Walsh, present for the meeting, said he felt the survey reflected his and other officials’ lack of familiarity with the details of the financial processes and controls in place in the town.

Geary said that was to be expected but emphasized that the auditors’ examination of those controls and processes would help keep fraud detection as a function of internal management — with the periodic checks of external audits. TGM had already tested a variety of typical transactions through the town’s system, Geary said, and found they matched narratives documenting how the processes were supposed to work.

If there is any significant flaw in the town’s accounting system, Geary noted, it’s also something cited as one of its strengths: Connery herself.

While officials and committee members dealing with financial issues in the town have heaped praise upon her at every opportunity, she’s also the core of the town’s compact financial face — one of only 1.5 employees who deal with financial matters. (One employee assists Connery on a part-time basis.)

That small of a staff necessarily limits the separation of duties — an inherent vulnerability, Geary said.

However, he was quick to note that increasing the number of people in the town’s financial department was a cost/benefit issue and that dealing with the potential for fraud required a proportional response to “key vulnerabilities” — of which he said Bethany Beach really had none.

TGM had found the current system adequate, he said, and was focusing instead on limiting opportunities for fraud by limiting cash transactions.

Geary again praised Connery’s work in making the town’s financial records ready for the GASB 34 transition, noting she had done a good job of maintaining property standards and accounting for depreciation of the town’s assets.

He said most municipalities had trouble tracking the value of such assets as sidewalks and streets, which do depreciate over time, but that Connery had been able to track records of payments for paving and was already ahead of the game in terms of applying depreciation principles to those costs, as well as other aspects of the conversion.

Council Member and Secretary-Treasurer Tony McClenny also praised Connery in assisting him to footnote the town’s monthly financial report to account for variations from expected revenue and expenditures. He cited the case of shortfalls recently reported in annual water department revenue — attributed easily to the delay in implementing increased water rates in 2004.

McClenny said the town’s reporting for its monthly finances had thus far proven detailed enough to satisfy the financially astute without providing too much information for the general public to digest.

Summarizing the audit process thus far and without providing specifics, Geary said TGM had identified a number of informal recommendations for the town, passed on to Connery verbally as the process continued. Formal recommendations on larger concerns will wait for an official letter to the town at the end of the process, he said.

The timetable for the audit is far from concrete, but Geary said he hoped the firm would start to put together some financial reports this week. The process will naturally be slowed by the difficulty of the GASB 34 conversion, but Geary noted it should be “push-button” in future years, once the conversion has been made. A draft financial statement could be expected within a few weeks, he noted.

Another snag in this conversion year is the lack of ability to create a true comparative report to analyze this fiscal year against the previous one, Geary said. In the future, with GASB 34 reports the norm, annual financial reports will allow easy comparison between one year and others.

While reports developed in the old way will still be included in the town’s financial package, Geary said the new package would make the whole set of information easier to work with and more readable. It will also show clearly what the town’s finances actually did, versus what they were expected to do, he said.

That also raised the issue of what the town wanted as its financial focus, the equivalent to a profit/loss statement or any other kind of annual performance measure that would exist for a business. In discussing the idea, committee members informally dabbled with broad concepts such as using town funds to preserve its quality of life.

Connery said town officials could choose to state financial objectives this year, with a GASB 34 report ready for comparison to those objectives next year. She suggested a narrative be included in the annual report – one that could reflect the status of targeted projects and the reasons they were completed or not completed.

The recent scrapping of plans for a major floodwater pumping project on Pennsylvania Avenue was cited as one example of a project that might be publicized and budgeted for but not come to fruition. (Engineering studies showed initial plans were unrealistic, due to the realities of water flow in the Loop Canal.) representation) and quickly returned to the numbers.