Debating engagements

As the governing body of Saratoga faces rapidly approaching deadlines related to the audit of Fiscal Year 2019/2020, the Saratoga Town Council discussed a re-engagement with James Childress of Childress Accounting and Consulting during their December 15 meeting.

While no formal action was taken on the engagement letters from Childress, much of the discussion was haunted by the specter of interfund overhead allocations. Such allocations have faced vocal opposition from Councilmember Jon Nelson since their first mention by Childress in May.

Unreasonable Allocations?

As was reported previously (See “What is a reasonable allocation?” on page 1 of the May 27 Saratoga Sun), Childress first introduced the idea of interfund overhead allocations as he was preparing a report going over 20 years of financials for the Town of Saratoga. While the third-party accountant stated that the enterprise funds managed by the Town were restricted, he also recommended that those funds should have been charged an interfund overhead allocation.

Following a dramatic change in several fund balances between March and April (see “Questioning changes” on page 1 of the April 29 Saratoga Sun), Nelson had repeatedly requested that those changes be reversed. A unanimous vote by the governing body (see “Forward with financials” on page 3 of the August 26 Saratoga Sun) requested that the retroactive overhead allocations applied by Childress be reversed.

The reversal of those allocations, however, had not occurred as of December 15. In an email sent by Mayor Pro-Tem Bob Keel to the rest of the council, and incoming council members Creed James and Ben Spaulding, Childress stated that the governing body must accept that interfund transfers occurred.

“Have interfund transfers actually occurred in the past, in terms of the actual cash contained in each fund? Three professional accounting firms have advised the Town the answer to this is YES,” wrote Childress. “The primary support of this is the actual transacting of business in the funds causing them to drop below a zero balance. Negative cash does not exist, and so interfund transfers do exist.”

Childress went on to write that for the Town to not consider that interfund transfers took place would make it appear as if the governing body disagreed with “decades of their own representations to their own auditors”, state statute in regards to deficit fund balances, their own internal interfund operational structure and the “logical conclusion in observing the action of cash between the town funds”.

The term “action of cash” was one used by Childress in his June presentation to the town council (see “Bubble gum, duct tape and pickles” on page 1 of the July 1 Saratoga Sun) to explain how money was transferred from enterprise funds into the general fund. Childress’ explanation has been that, due to the Town operation on a cash basis of accounting and negative cash being unable to exist, that money was pulled from the enterprise funds into the general fund.

“All of the audits that have been accepted in the past have been accepted under the assumption that these interfund transfers were happening. They weren’t retroactive at the time. It was an assumption,” said Keel. “It wasn’t something councils approved, it was something (that) an assumption was made and the councils approved it.”

What the Shell?

“The report does not show where the money transferred to and fro. You’re playing a shell game. It does not show we took money from here and put it here, at all,” said Councilmember D’Ron Campbell. “It’s a Vegas game, is what this is, and Childress did not address any of that and you paid him $90,000 this year for not doing a proper job?”

Nelson followed Campbell by raising the issue of the changes to fund balances between March and April applied to the water fund, sewer fund, landfill fund, and weed and pest fund.

“That’s that movement of, roughly, $1.3 million that we talked about in March and April. The auditors took exception to this,” said Nelson. “They gave us a modified opinion on these balances.”

As was previously reported (see “Auditors issue qualified opinion” on page 1 of the August 5 Saratoga Sun), accounting firm Carver, Florek and James issued a qualified opinion to the Town of Saratoga in their audit of Fiscal Year 2019/2020. 

Under the basis for qualified opinion, the auditors wrote “Management has been unable to reconcile interfund transfers and borrowings, and therefore current cash and fund balances presented may be inaccurate at the fund level. The Town has chosen to present the financial statements in accordance with the cash basis of accounting and therefore no interfund receivables and liabilities have been recorded to reflect this activity.”

Nelson further stated that both the introduction of interfund overhead allocations and the 20 year examination of the Town’s finances had only one purpose; to “wipe out” out the accrued balances of the enterprise funds. He added that it was his belief that the allocations and the amount of time Childress went back in the finances was arbitrary.

“It’s not accounting. It’s creative accounting, I’ll put it that way. It’s a creative way to use accounting to work your way out of a hole so that you can present balances that comply with the state statute,” Nelson said. “As you read, James is saying that to take objection to overhead allocations is meaning you object to the state statute. I don’t object to the state statute at all. I would agree that the state statute certainly hasn’t been followed, that we’ve had negative fund balances in the past. That doesn’t make it go away.”

Moving Forward

As discussion continued, Nelson stated that he was “not willing to take ownership of those problems that occurred under past councils”. Referencing the fund balances shown prior to March and fund balances show in prior audits by Anton Collins Mitchell (ACM), Nelson stated that he wasn’t going to “inherit that (overhead allocations) and wipe it away.”

“That’s true, you don’t have to do it, but if you don’t do it then we don’t get an audit. We don’t get an audit, we lose federal funding,” said Keel. “That’s the issue I’ve been trying to bring to light. If we don’t do these retroactive interfund allocations, what is the way out?” 

Eventually, Nelson proposed that the council go through the engagement letters sent by Childress. Keel responded by asking why the council should bother if it was neither Nelson’s nor Campbell’s intention to re-engage with the accountant. 

“I want to go through the letters in detail because my basis for whether we move forward with Mr. Childress or not is going to be based on what those engagement letters say, not based on the threat of not getting an audit,” replied Nelson.

“You can call it a threat or it’s just reality,” said Councilmember Judy Welton.

Ultimately, the governing body decided to table the engagement letters until the first meeting in January to allow time to review the letters and to allow James and Spaulding to vote on the engagement.

The next meeting of the Saratoga Town Council will be at 7 p.m. on January 5, 2021 at Saratoga Town Hall.