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County board discusses state auditor's findings

After reviewing Hubbard County's 2015 and 2016 audit reports with Colleen Hoffman of Hoffman, Philipp & Knutson, the county board opted to terminate their contract with the private accounting firm.

County commissioners then authorized County Auditor-Treasurer Kay Rave to engage the Office of the State Auditor to work on the 2017 audit.

Last year, State Auditor Rebecca Otto deemed fiscal year 2015 audit results by Hoffman, Philipp & Knutson "substandard" and grounds for her office to re-audit the eight counties that hired the Thief River Falls-based firm. The other counties are Koochiching, Roseau, Clearwater, Kittson, Lake of the Woods, Pennington and Red Lake.

In late May 2018, Otto released her 2015 re-audits for three counties: Hubbard, Kittson and Pennington.

"No one has received a bill yet. No one is getting re-audited for 2016 yet," Hoffman said.

Hoffman said she has received no direct feedback from state or federal boards of review who analyzed her firm's 2015 audits, so she was proceeding with the 2017 audit.

Hoffman said she has reviewed Otto's re-audit and findings.

"For some reason, they issued a lot of immaterial adjustments," she said. "There are a few things we have some fundamental disagreements with on the larger adjustments, so that remains to be seen on how that will be handled."

Otto's re-audit results found "material weaknesses" and "significant deficiencies" in the county's internal control over financial reporting and major federal award programs. Otto tested Hubbard County's medical assistance program in her re-audit of 2015.

"They had a different classification for the federal revenue, which now we are changing to. It's a reimbursement for service instead of a grant. It's a technical issue on the language. It doesn't affect your financial statements other than how you're going to select the medical programs for review," Hoffman said.

Hoffman said she would revisit this in the 2017 audit to make sure documentation is corrected and the supervisor is signing off. "Those are basically the things the state auditor pointed out in your 2015 audit."

Hoffman apologized for the state auditor's other findings. "It's more political than it is audit industry standard," she said.

Summary of findings

Otto cited a lack of segregation of accounting duties due to the limited number of personnel, which "affect the county's ability to detect misstatements in a timely period." The state auditor recommended that Hubbard County's elected officials and management be mindful of the increased risks in safeguarding the county's assets. Otto also said a formal plan should be developed to assess risk and monitor the internal controls to see if they are still effective or changes are needed.

In addition, adjustments to the county's general ledger were necessary in 2015 to balance the actual amount of pooled cash on hand. Otto noted there have been unreconciled cash differences for a number of years. In 2015, the total difference was $36,109. Of this amount, Otto noted that $21,682 was subsequently identified as cash and miscellaneous corrections that were not recorded in the general ledger during the year. "The cause of the remaining difference was not identified."

Prior period adjustments were also identified in Otto's re-audit. "Transfers, expenditures and revenue were reported incorrectly in the county's 2014 financial statements," she wrote. The Jan. 1, 2015 fund balance was decreased by $1,000,000 as a result of not recording the transfer to the Heritage Center Project Enterprise Fund. Social Services expenditures were recorded twice in 2014, resulting in a $238,775 increase in that revenue fund. Tax-forfeited sales revenue was decreased by $133,991.

Otto reported that "material audit adjustments were identified that resulted in significant changes to the county's financial statements," such as a $415,188 adjustment to the road and bridge fund, $560,603 to land and timber sales revenue; $472,664 in the forfeited tax sales and $113,873 in the Heritage Center Project. These adjustments were found in Hoffman's audit; however, "independent external auditors cannot be considered part of the county's internal control," Otto wrote.

She recommended that "county staff implement procedures over financial reporting that include review of balances, disclosures and supporting documentation by a qualified individual to ensure the information is complete and accurate so the county's financial statements are fairly presented."

Otto found six errors in the 2015 financial report originally prepared by Hoffman, noting "the county did not have an adequate process in place to review the financial report before it was released."

The county also lacks a formal process to document, review and approve Social Services Department journal entries, Otto wrote.

In the course of auditing, Hoffman noted that her firm works with the county department head if there is an issue that needs correction. If the item isn't corrected by December, it would warrant a written opinion in the audit, she said. "We don't try to drag you through some dirty publicity."

Minnesota legal compliance

Otto determined the county was not in compliance with Minnesota statutes which requires sealed bids or direct negotiation for contracts estimated between $25,000 and $100,000 regarding contracting. Five of 16 purchases in 2015 were tested for compliance. In two instances, contracts were awarded based on a single quote.

Finally, Otto discovered the bylaws of the Heritage Living Center Board were amended in 2007 to remove the county board's jurisdiction and control over the center's board. "The county board approved amendments to the bylaws of the Heritage Living Center Board that they did not realize were not in compliance with state statutes," Otto wrote. The bylaws must be corrected to recognize the county's jurisdiction.

Rave noted that Otto tasked the county with 20 corrective action plans.

A written response to prior findings are required by Hubbard County in the 2017 audit, Hoffman said. "We'll say how they were resolved or not resolved."

Since the 2016 audit wasn't completed by Sept. 30, Rave noted the county lost its status as a "low-risk auditee."

Hoffman said the state auditor's re-auditing was the reason for the tardiness. "We spent over 2,000 hours dealing with the state auditor's office, so I got behind on all of the audits," she said. "There was this huge distraction. I haven't dealt with the damage to my firm and my clients yet, as far as repercussions, retaliation. We're just waiting for feedback from these independent reviews that have happened."

Non-low risk means that instead of auditing 20 percent of federal expenditures, auditors must do 40 percent. "It's more work for the audit," Hoffman said, resulting in a more expensive audit but Hoffman's firm would absorb that cost.

Hoffman said she would have no hard feelings if the county decided to end a five-year contract with her firm. "I can assure you we are continuing on with all the other counties."

At the conclusion of the July 17 board meeting, commissioners voted to end the contract.

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