State audit: $277,647 embezzled
Officials to present findings at Stevensville meeting tonight; in document, council criticized for failing to monitor former manager
By WILLIAM F. AST III - H-P Staff Writer
Published: Wednesday, February 17, 2010 1:10 PM EST
STEVENSVILLE
A draft copy of Stevensville's state audit said $277,647 has been embezzled from the village.
That and findings of a collapse of financial oversight in the village will be presented to the Stevensville Village Council at special council meeting at 6 p.m. today. The findings are scheduled to be presented by state treasury officials, and the council will be asked to accept the audit.
"As of March 31, 2009, the independent CPA (certified public accountant) firm has confirmed an embezzlement of $277,647 from the Village's various funds," the draft audit said. "This loss will have a serious impact on the services provided by the Village."
The draft audit does not say who allegedly embezzled the money but refers to "embezzlement" several times. The alleged embezzlement is being investigated by law enforcement agencies, village officials said.
The audit said the Village Council failed in its duty to oversee the performance of the "former village manager." The audit notes do not mention a name, but the former village manager is Todd Gardner.
Despite the warning about the impact on services, village officials said there won't be a noticeable loss of services to residents. Also, village officials say they will not raise taxes to make up for the lost money.
The Herald-Palladium did not have access to the completed audit. Notes to the draft audit, however, show a meltdown in the village's keeping of financial records.
Stevensville last year asked CPA Stephen Ross of Stephen Ross & Co. to reconstruct the village's financial records back to fiscal 2007, work that the state audit said cost $44,573. The village hasn't had an audit since 2006, and the one prepared by the state shows a disastrous lapse of fiscal oversight during that time.
"The Village council has failed to monitor the internal control activities of the Village," notes to the audit stated. "The Village Manager was given full control of the Village's financial records with no oversight."
That failure "has led to the embezzlement and the inability of the Village council to determine its overall financial condition," the audit continued.
"Prior to the reconstruction done by the independent CPA firm, the Village's records did not reflect all of the bank accounts or the revenue and expense activity for the year including those amounts embezzled from the Village," the notes said. "... Therefore, the financial statements produced and reviewed by the Village Council were inaccurate and irrelevant. ... The Village council, in no way possible, has the ability to make sound business decisions because it has no financial data on which to make an evaluation."
In an e-mail to The Herald-Palladium on Tuesday, Gardner said, "I have not read the audit report or the notes so obviously I can't comment on it."
However, Gardner said he was aware that the books didn't balance.
"In early 2007 I produced my first (after the Treasurer departed) financial reports to the Finance committee, and subsequently they were presented to the council. In these reports I disclosed a $61,000 unpaid payroll tax liability and a $241,000 balance sheet shortfall.
"Shortly after submitting the reports certain members of the finance committee and myself reviewed a portion of the financial records. I was astonished to find stacks of undeposited checks, unopened bank statements and numerous other irregularities. I am sorry to say that the committee took no action whatsoever."
No checks, no balances
One of the biggest flaws was the lack of checks and balances, the audit said. Village officials say that has already been changed, with, for example, one official now writing checks and another official signing the checks.
The village has been left with more bills than revenue. Outstanding bills include $42,623 to Ann Arbor lawyer Jerold Lax for the village's now-dropped lawsuit against the Southwest Michigan Regional Sanitary Sewer and Water Authority, and federal and state payroll withholdings unpaid since January 2007. Some shortfalls already have been made up, and some creditors have been asked to wait for payment.
In addition, the village's Downtown Development Authority owes $691,435 to 1st Source Bank. The Village Council, acting for the DDA, got a line of credit from the bank so the DDA could buy residential lots and tear down the houses to expand the downtown commercial area. The money was to be repaid through lot sales, but the recession hit, no sales have been made, and the lots are now assessed at about a third of what the DDA paid for them.
"The Village Council must now assume the responsibility of paying the principal balance of $691,435," the audit said. "... Also, the Village may have obtained an illegal loan" and the village should seek legal advice on the loan's validity, the audit said.
There are actually two loans. The draft audit said that "... the structure of both 'notes' is to only pay principal at the conclusion of the loan, making them questionable as if they are legal instruments for a governmental unit to use," the audit said.
The manager's tale
"Beginning in November 2006, the former Village Manager assumed the responsibilities of the Village Treasurer, but failed to record all accounts, maintain bank statements, or reconcile accounts due to the improprieties performed," the draft audit said. "... The Village Manager discontinued the practice of writing receipts and maintaining deposit slips when he took over the Treasurer's position and no other Village personnel provided oversight of the receipting activities."
The audit also said, "The Village Manager was given sole control over the disbursement process with only limited oversight from the Village Council. ... Inappropriate disbursements were made."
The audit said the village didn't withhold Medicare and Social Security taxes in its meeting payments to council members, and that from February 2007 to January 2009 it didn't pay federal and state withholding taxes or unemployment taxes for employees. "The former Village Manager assumed full control of the payroll function and did not withhold the taxes correctly," the audit said.
Ross, the CPA hired to reconstruct the books, wrote in a Sept. 2 letter to the village that Gardner "purposely deceived the council" after the Internal Revenue Service and the state of Michigan started sending letters to the village about missed payments. "Mr. Gardner was responsible (for) the village's finances," Ross wrote, adding later, "... After (Gardner's) termination the Village Council discovered that the village's finances and accounting records were in total disarray going back to November 2006."
The village's accounting software "does not prevent the deletion or modification of posted transactions" and management failed to use the software's "audit trail" feature to track such changes, the audit said. That failure "became much more evident with the modification of the transaction that led to the embezzlement."
Gardner was hired in April 2006. Villages are required to have audits only every two years, and the council agreed to have the audit every two years instead of annually, which is allowable under state law. Council members say Gardner suggested having the audit every two years, though Gardner said earlier that the 2007 audit was canceled because village accountant Stephen Ross abruptly resigned as the village's accountant in July of 2007.
Village officials said Gardner in 2008 told them the books weren't ready for an audit. In May 2009, the council voted to not extend Gardner's contract, and it quickly became apparent that the books were in disarray.
Treasurer Jan Lausch-Zilke had resigned in November 2006, reportedly because of some disagreements with Gardner. The council did not hire another treasurer until just recently.
Village officials said Gardner had argued that as chief executive officer he was also chief financial officer. He disputes that the council ever named him interim treasurer, though Berrien County Prosecutor Art Cotter in May 2007 said it was legal for Gardner to be both manager and interim treasurer. Cotter made that determination after lawyer Scott Dienes made an inquiry about the matter.
Tried to resign
Gardner's account differs.
In e-mails to The Herald-Palladium, Gardner said he tried repeatedly to resign from the manager's post, in part because village accounts were already in a mess. "... each and every time I offered my resignation the council literally begged me to stay," Gardner wrote.
Gardner also sent copies of letters from the village's auditor dated 2001 and 2003 through 2006, which stated numerous problems with the accounts. "During the audit, it was difficult to trace receipts and deposits," said the 2006 letter from the now-disbanded firm of Barnes & Ross.
"It is apparent to me that the obstacles to my success as the Chief Administrative Officer of the Village of Stevensville are insurmountable," Gardner wrote in a letter to the council dated June 1, 2006. "The myriad of issues and demands of the many committees, boards, associations, organizations and the Village Council are outside the capability of a single executive."
In a resignation letter dated Sept. 6, 2006, Gardner wrote, "I have repeatedly identified and presented a number of serious deficiencies in the Village record keeping, accounting systems, controls and procedures, payroll, investments, cash management, expense and payable disbursements, to name a few. During our recent audit I became aware that the aforementioned and additional issues date back as far as 2001 and still remain unaddressed.
"... The persistent lack of cooperation, professionalism and accountability from certain employees and interference from other officials has made the environment and circumstances of my employment as Village Manager intolerable."
However, the council persuaded him to stay on, Gardner said.
Gardner's tenure was marked by ongoing battles with Lincoln Township and the water authority boards that serve the village and surrounding townships.
The audit by the Michigan Department of Treasury that will be presented this evening was supposed to be done in December, and then it was supposed to be delivered in January. State officials said the audit simply wasn't finished until now.
Remedy
Interim Village Manager Brett Witkowski has limited the village to paying just $35,000 a month in bills until all the overdue accounts are taken care of. The village is paying interest only on the DDA loans.
Witkowski also said that, despite the audit's warning about village services, most residents will notice nothing unusual as the village works its way out of the problem.
There is no longer a full-time manager, but public works services such as garbage collection and street plowing won't be affected, Witkowski said. "That's what you make sure keeps going, and (public works) have adjusted," Witkowski said.
Witkowski said Stevensville will see a quick recovery.
"The advantage of a village is they can turn around quickly, as compared to a city," Witkowski said. "Three Oaks got turned around quickly. When this is done, (Stevensville) will have a surplus of $100,000 a year."
Witkowski is a member of the seven-member review team that recommended the state take over the city of Benton Harbor's finances. He also helped the village of Three Oaks in its recent financial crisis.
wast@TheH-P.com
