Philadephia’s city controller released a damning report Tuesday finding that the City of Brotherly Love ranked at the bottom among the top 10 biggest cities in the U.S. in terms of its internal controls and accounting practices.
Two material weaknesses and eight significant deficiencies in internal controls over financial reporting resulted in $33 million being unaccounted for in the city’s largest cash account, according to City Controller Rebecca Rhynhart, along with $924 million in undetected material misstatements that occurred in the preparation of Philadelphia’s financial reports.
“The material weaknesses and significant deficiencies in internal control over financial reporting are not isolated incidents; they are indicative of a much larger problem,” she said in a statement. “Philadelphia has serious issues with its financial management. Compared to the other top 10 largest cities, Philadelphia has by far the largest number of reportable internal control findings. If these deficiencies continue to go unaddressed, this could result in the city’s financial statements being considered an inefficient tool for assessing the city’s financial health.”
The finance department needs to rely on auditors from her office to reconcile its ledgers. The material weaknesses included the Treasurer’s Office bank reconciliation process creating the potential for significant errors and irregularities. By not properly reconciling the city’s biggest cash account, known as the consolidated cash account, from fiscal year 2015 through the first 11 months of fiscal year 2017, a variance of $33 million (as of June 30, 2017) occurred between the account’s book and the bank balance. Other accounts that are supposed to be reconciled by the Treasurer’s Office have also gone unreconciled, the report noted, some dating back as far as September 2010.
In response to the Controller’s Office report findings and recommendations, the Finance Office offered a plan for remediating the cash control weaknesses, including hiring an outside accounting firm to reconcile the consolidated cash account, working with an outside consultant to develop additional internal controls and corrective action plans to ensure timely reconciliations in the future, and preparing weekly status reports to closely monitor the progress of reconciling all accounts. The Finance Office pointed out in response to the report that the $33 million variance has been reduced to $28.6 million, but the Controller’s Office has not verified this amount at this time.
Other material weakness included inadequate staffing levels, lack of technological investment, and insufficient oversight that have led to undetected material misstatements. They included:
• Payment vouchers approved without required management authorization;
• Allowing unauthorized individuals to approve bi-weekly payrolls increases risk for improprieties;
• Failure to segregate payroll duties could allow fraud to occur;
• Capital asset control deficiencies increase risk of reporting errors;
• Failure to timely transfer funds between city bank accounts could result in significant reporting errors;
• Lax monitoring of adjustments to tax accounts may lead to undetected errors or irregularities;
• Standard Accounting Procedures (SAPs) require updating to ensure accurate and consistent application of accounting rules and regulations; and
• General information technology controls require strengthening.
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