by Glenn Cheney

Providence, R.I. — Rhode Island may be small, but its accounting problems are big — so big that they can’t be fixed, according to the state’s general auditor, Ernest A. Almonte.

Since 2002, Almonte has been qualifying his audits and sending letters to the state administration warning of “significant deficiencies.” Those deficiencies range from an unworkable computer system to unreconciled bank statements to inexcusably delayed financial statements.

The biggest problem, Almonte said, is an unwillingness on the part of the state administration to make the necessary improvements.

“I’ve been trying to change the tone at the top to make people focus on getting financial statements done on a timely basis and take care of the problems that are inherent in the system,” Almonte said. “I’ve always felt that companies should not wait until an audit to find out how they’re doing, and neither should a large organization such as the State of Rhode Island.”

Almonte said that the norm in Rhode Island has been to submit seriously flawed financial information for an audit. That leaves him questioning how state officials make day-to-day financial decisions with that same data.

Recently, the state began to require municipalities to produce their financial statements by Dec. 31, six months after the close of most fiscal years. Last year, all but four complied, and those four expect to be done in the first quarter of 2004.

The state, on the other hand, didn’t issue a financial statement for 2001-2002 until November of 2003.

“I’ve found that getting financial statements done on a timely basis has not been a priority,” Almonte said. “To me, timely means no later than Dec. 31, so that before you prepare your budget and send it to the legislature for approval, you already know how you did in the previous year.”

One very big step, Almonte said, would be to reconcile bank statements regularly and without delay. In a letter to Beverly Najarian, newly appointed director of administration, Almonte pointed out that the June 30, 2003, bank reconciliation for the general fund is not expected until April 2004. A similar delay in the previous year led to a delay in the 2002 audit.

Almonte acknowledged that the state does write a lot of checks, but said that the computation shouldn’t be all that complicated. He suggested that one big reason for timely reconciliations, besides the avoidance of “rubber” checks, is that the act of reconciliation functions as a test of the accounting system.

“Bank reconciliations are a defense mechanism to help you catch problems early on, but if you have a flawed accounting system and you’re not doing your bank reconciliations until a year later, you’re not catching problems until very late down the road,” Almonte said.

That flawed system, Almonte said, is probably flawed beyond repair.

In his letter to Najarian, Almonte specified the sources of his concerns. As of March 2, he had not received a response, and Najarian declined to discuss the issue with Accounting Today.

Rhode Island state controller Lawrence C. Franklin Jr. said that the problem isn’t lack of will; it’s lack of funding.

“There’s no money in the budget to advance the [computer] system beyond the three modules that we’ve implemented, so I’m not sure how much we’ll be able to do to eliminate several of the auditor’s qualifications,” Franklin said. “They’ve put an extra million dollars in the 2005 budget, but I’m not sure that’s going to do a whole heck of a lot for us.”

Almonte believes that it would cost $20 million to implement a workable system. Franklin said that the state’s chief information officer estimated that $15 million would suffice.

It was the new computer system, called RISAIL, that created many of the problems, Franklin explained. The treasurer’s office had trouble converting to the new system, and complications with the conversion to RISAIL’s double-entry bookkeeping system led to errors, confusion and delays.

“Some of the debits and credits threw them for a loop, because they weren’t used to dealing with that,” Franklin explained. “There was also human error in extracting information from the new system and posting it to the old system. Because of the debit and credit issue, some things were misinterpreted and were added that should have been subtracted. That created some problems for them.”

Almonte said that the financial statement for the fiscal year ending June 30, 2003, is scheduled to be issued by the end of August 2004. He sees little likelihood of making that date, however, because delivery of draft financial statements is lagging behind the scheduled delivery dates.

Almonte’s letter to Najarian cites 10 specific problems.

Among them are the RISAIL system, identification of capital outlay expenditures, bank reconciliations for employee retirement trust funds, encumbrances that are not presented as a reservation of fund balances, incomplete recording of the liability for compensated absences, certain categories of capital assets, and numerous internal control weaknesses.

The letter said that the financial statements part of the 2003 Single Audit Report was scheduled to be ready no later than June 30, 2004, provided Almonte’s several concerns were addressed.

Part of the delay, he explained, was due to the delay in finishing the previous year’s audit, but as of the date of the letter, Feb. 23, 2004, his office had not received draft financial statements for the general fund or the employee security fund.

Some of the draft statements already received are flawed due to inaccuracies in the RISAIL information. State controller Franklin said that he believes that the data integrity problems have been resolved.

In an effort to comply with Governmental Accounting Standards Board Statement 34, the state has just issued a report on its inventory of capital assets as of June 30, 2002, the first such report in Rhode Island history. Almonte, who issued the report, said that it is flawed, with the historical cost data for certain categories of capital assets still incomplete.

The report said that the state owns 97,000 acres of land — about 14 percent of Rhode Island’s total land area. Buildings and related improvements were recorded at $576 million before accumulated depreciation of $214 million.

Much, however, remains unaccounted for. “We could not satisfy ourselves as to the completeness of certain categories of capital assets — furniture and equipment (including computer systems) — and building improvements due to an insufficient number of physical inventories and weaknesses in accounting controls over the accumulation of such data,” the report stated. The report listed several recommendations for making a complete inventory possible.

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