LOVINGTON — Coming back from a chaotic year, pandemic restrictions, an oilfield decline and mandated closures, the Lovington City Commission approved the city’s Annual Financial Report for 2020.
State auditor De’Aun Willoughby presented before the commission the city’s annual financial audit for the fiscal year 2019-20 and the commission approved the resolution to accept it. This audit was conducted by Willoughby, a certified public accountant, and resulted in six material weaknesses compared to last year’s audit of three material weakness findings.
Willoughby noted that the material weaknesses were preparation of schedule of receivables, capital assets, journal entries, cash management, retirement plan and adjustment to customer water accounts.
A material weakness is when one or more of a business’ internal controls (activities, rules and processes) designed to prevent significant financial statement irregularities and improve operation efficiency – is ineffective.
Capital assets, according to Willoughby, is a material weakness and a “pretty big issue” for the city.
“It almost caused me to issue a modified opinion,” Willoughby stated before the commission. “This has to do with your depreciation. I will say that you do take an inventory of all of your equipment throughout the city and that is to be commended. I was a million dollars off comparing last year’s audit plus this year’s new purchases. There was a million dollars difference.”
Willoughby said the reason behind this deficiency is due to missing capital assets that were added to the depreciation schedule with estimated purchase date and price, or assets were disposed of if they could not be located.
An example of this was listed in the audit, “In one case, the auditor found a vehicle on the depreciation schedule that was subsequently added again at an estimated value.”
The auditor could not reconcile the year’s prior depreciation schedule with a difference in net capital assets being $1,127,750.
Willoughby noted that despite the deficiencies, the capital assets still “swung one way with costs and the other with accumulated depreciation. If you net the two, you are fairly presented.”
Journal entries were considered a material weakness due to them being so dangerous.
“Because you can change things, manipulate numbers, etc.,” Willoughby stated.
There was a total of $225,020.70 worth adjusting journal entries tested and they were made without supporting documentation.
Cash management was a material weakness due to difficulties the city has had reconciling their bank statement and cash from different departments.
“A lot of it is how your chart of accounts in your books are set up,” Willoughby stated. “I’ve learned that you had your previous software’s chart of accounts loaded or pushed into your current set of books. It is not set up correctly and it is not working correctly. My thoughts are you’ll never be able to reconcile and do a bank reconciliation the way it’s set up right now. You end up with payroll liabilities, accounts payable and receivable. All of those things affect your revenue and expenses. When you try to reconcile your cash you have those items included so you’re never going to reconcile the way that it’s set up right now.”
Commissioner Paul Campos asked Willoughby what her recommendation is to reconcile the city’s funds with the system they have in place.
Willoughby responded by saying the city needed to start over, effective July 1 and “I (Willoughby) don’t see any way to repair what you have.”
“Unfortunately it’s a result of pushing that chart of accounts into your books,” Willoughby said. “At some point, someone tried very hard to correct it. I don’t believe that it can be corrected. You need to start over and start your books over.”
Along with starting its books over Willoughby recommended to the city commission to get new software, clear the city’s database and sett chart of accounts up correctly, including payroll. Payroll being the biggest part of the problem, according to Willoughby.
Willoughby noted if the city were to outsource their payroll this may help mitigate the problem, possibly even correct the issue long enough for the city to get its accounts in order.
Lovington Mayor David Trujillo said the issues they were having with cash management was due to the way the previous city treasurer was uploading data into their accounting software.
“What the problem was, was our previous treasurer was trying to dump the old software into the new Tyler software and it did not work,” Trujillo explained. “The two software’s were non-compatible and when he did that it misrepresented numbers and instead of trying to make the corrections he was doing numbers more manually than relying on the software. He should’ve started over and maybe taken a couple of weeks or three weeks to try to line everything up directly with the new Tyler software instead of trying to dump the old system into the new system.”
Trujillo stated the changes the city made to help address the payroll issues is by taking measures to correct what the auditor asked as well as limiting access from six people to three regarding information on financing and payroll.
Willoughby went on to state that on the business end of things for the city, water and wastewater had more expenses than revenue of $115,000; solid waste had more expenses than revenue of $359,000; ambulance services had more expenses than revenue of $759,000.
“Your business-type activities, this is for profit, you try to break even and make a profit, (the city) went in the hole $1 million last year,” Willoughby noted to the commission.
Willoughby said that for the year 2020 there were “more expenses than income in governmental activities of $2.1 million.”
Despite the issues the city had, Trujillo believes the changes the city is making this year to the way they are conducting operations will reflect an improved financial audit for the following year.
“It’s a working process of how we are restructuring our finances,” Trujillo said. “I feel that no later than November 1 everything we’ve done will reflect a nice clean audit for this fiscal year.”