As MSD spent millions, audit committee vanished

During the years when the Metropolitan Sewer District spent $680 million with very little oversight, an independent city committee created to watchdog such spending stopped operating.

An independent oversight committee – which is called for in the city’s administrative code – is supposed to assist the audit department in monitoring government spending. Yet it hasn’t operated since 2008, records show. Nor has it engaged in peer review, involving auditors elsewhere assessing its work, something that is considered best practice in the industry.

There is no record on the city’s website of any review of MSD spending by the audit department in recent years.

Now, as Ohio Auditor Dave Yost embarks on a forensic audit of the sewer utility, Councilman Kevin Flynn is calling on him to also look at the city’s audit department. Flynn wants Yost to “make recommendations on bringing us up to current standards for government internal auditing.”

Flynn has been calling for audit department oversight for months. He’s bringing the issue to the forefront in the wake of The Enquirer’s special report into MSD last week. That report, based on a review of 10 years of MSD records, found that the sewer district spent millions in public money during the past decade with little or no oversight from anyone outside the agency.

“Everyone’s eyes glazed over last year, but with MSD it’s the perfect time to talk about it again,” Flynn said. “It’s sexy now that there is a scandal.”

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City Manager Harry Black said Monday the committee will be reformed. Mayor John Cranley pledged to work with Flynn on the issue.

“We need to make the audit division a priority in the upcoming budget and give citizens confidence that we are watchdogs of their money,” Flynn said. “Where there are inefficiencies, we need to identify them, acknowledge them and then fix them.”

Flynn, chairman of council’s Rules and Audit Committee, has called a hearing on the matter Tuesday.

Last fall, he asked council to beef up peer review of the department, which would have cost roughly $25,000, but was ignored. And behind the scenes, Flynn has been asking for months that the oversight committee be reformed. Flynn has identified two members, both whom were confirmed this month.

“I got tired of waiting,” Flynn said.

Nonetheless, the oversight committee has five vacancies remaining and cannot yet operate.

Black said it’s best practice for the department to be overseen by the oversight committee, which would have three people appointed by council and four by the mayor.

It’s unclear why the city abandoned the committee in 2008, when Mark Mallory was mayor. Black said he doesn’t believe disbanding the committee was intentional.

“It’s just something that didn’t get done,” Black said. “With the leadership of Flynn, it looks like we are moving in the direction of re-establishing a committee and coming into alignment with the administrative code.”

Currently, Black oversees the audit department, which typically does two or three audits at once. They bring a list of ideas to him and then together determine which “present the greatest value,” Black said.

Kymber Waltmunson, an auditor of King County, Washington, and president of the Association of Local Government Auditors, said audit departments are a critical part of city government.

“Audit departments enhance accountability and transparency for taxpayers, build credibility, make sure public funds are spent in the public interest and give an independent perspective on how things should be done,” Waltmunson said. “Most other people in city government have a specific outcome they want. Auditors are following standards that give a ‘just the facts’ perspective. They have more credibility.”

Oversight boards are common and considered best practice, but cities don’t necessarily have to have them, Waltmunson said. For instance, she said, the department can report to the legislative branch. Reporting to the executive branch can create conflicts, she said.

However, peer review, she said, is critical and mandated by her organization’s standards. It should be done every three years, she said.

Flynn said he can’t find records of when a review was done last, but is certain one hasn’t happened in the last three to five years.

While the city’s audit department hasn’t looked at MSD recently, the state has. The state auditor conducted a routine review in 2014, noting several issues. None was deemed significant enough to include in the final audit report.

Instead, the auditor sent MSD a “management letter” that included recommendations for cleaning up some of those minor problems, such as understating money available in some accounts and overstating funds in others.

MSD understated its net pension obligation by $29,000, for example, and overstated accounts receivable by $150,000.

The upcoming audit will be far more thorough. Deputy Ohio Auditor Bob Hinkle said auditors will take a more “forensic” approach, possibly delving deeper into specific contracts, invoices and spending by the agency.

“We’re going to go beyond where we typically go,” Hinkle said.

Because state auditors monitor some 5,800 public agencies, Hinkle said, it’s a good idea for larger agencies to maintain their own internal audit departments to keep watch over public dollars. And he said that department should have at least some authority to act without interference from the organization’s leadership.

“It makes sense to have an internal audit structure,” Hinkle said. “It’s got to have some independence for it to be useful.”