Crestwood's finances mismanaged by former officials, audit alleges
Two former Crestwood officials violated the City Charter, numerous ordinances and their duties as fiduciary officers in their handling of the city's finances, a forensic audit alleges.
The forensic audit of fiscal 2001 and fiscal 2002, performed by Brown Smith Wallace, was initiated after current city officials began an internal investigation into the accounting practices used by former City Administrator Kent Leichliter and former Finance Officer Robert Wuebbels.
"As a result of our forensic investigative procedures, we have concluded that there have been a staggering amount of disbursements, improper journal entries and misrepresentations to the Board (of Aldermen) of the city's financial position, authorized by Leichliter and performed by both Leichliter and Wuebbels, representing mismanagement of city funds and financial reporting errors,'' states the report prepared by Donald L. Mitchell and Larry N. Pevnick of Brown Smith Wallace.
"Although the board has ultimate authority and oversight responsibilities, it is our opinion that they could not make the appropriate and necessary fiscal decisions for the city because they were misled by Leichliter and Wuebbels as to the true financial condition of the city,'' the report states. "Leichliter and Wuebbels' actions, as evidenced by the multitude of documents we reviewed, were in violation of numerous ordinances, the city of Crestwood's charter, possible state statutes, good financial practices, and, most importantly, their duties as fiduciary officers of the city of Crestwood.''
During a Dec. 10 closed session, the Board of Aldermen voted unanimously to approve a "reassignment agreement'' in which Leichliter, who had served as city manager since 1978, would retire from his post Dec. 31 and become an adviser to the Board of Aldermen in the newly created position of administrative adviser until March 2004.
Under the terms of the agreement, Leichliter would continue to receive his $91,056 salary until March 1, 2004.
However, during a closed session last week, the Board of Aldermen voted to terminate the reassignment agreement and to terminate all payments to Leichliter. Ward 3 Alderman Don Maddox's motion was seconded by Ward 2 Alderman Gary Vincent and unanimously approved Oct. 28.
Efforts to contact Leichliter before the Call's press time were unsuccessful.
Also during the Dec. 10 closed session, the Board of Aldermen voted unanimously to name Don Greer, who has served as the city's police chief since 1990 and continues in that role, city administrator.
In an executive summary of the forensic audit report, Greer states that shortly after assuming his new duties, he began inquiring into the city's historical financial information.
"Discovering the (former) finance officer had not created historical documentation that I considered sufficient to monitor cash flow, I found it necessary to create history of revenues and expenses from each of the primary funds. Among the significant findings was a concern with the financial records from June of 2002. It appeared that the city of Crestwood operated at a significantly lower expense position than what would be reasonable to consider,'' Greer's executive summary states.
"After reviewing the expense and revenue history, I questioned the (former) finance officer and confirmed that a rather large amount of expenses in excess of those approved by the Board of Aldermen had been transferred to the Capital Improvements Fund. The (former) finance officer indicated that he had transferred in excess of $250,000 in this manner ...
"Based largely upon violations of the city of Crestwood's charter, the resultant misrepresentation to the board and other financial problems, I asked for and received the finance officer's resignation in January 2003,'' the executive summary states.
Wuebbels told the Call Monday that he had not seen the forensic audit report and therefore could not comment on its findings.
During a Jan. 18 meeting of the city's Ways and Means Committee, Greer told members that while the Board of Aldermen was led to believe the city's general fund was balanced at the end of fiscal 2002, that was not the case.
Following the departures of Leichliter and Wuebbels, the forensic audit report states, "The city then began an internal investigation into the accounting practices used by these two individuals. The city's administration determined that there was significant questionable activity which required proceeding with a more intensive investigation by an external independent firm to look into the potential mismanagement of the city's financial affairs, impropriety with respect to the use of the city's funds, and financial reporting to the board.''
As part of their investigation, the forensic auditors researched whether any disbursements were approved that represented improper payments made to Leichliter or Wuebbels or on their behalf.
"... We reviewed selected payroll records for fiscal years ended 2001 and 2002 and performed certain tests on these records. We also reviewed bank statement reconciliations for the fiscal years ended June 30, 2001 and 2002. We identified the top salaried employees and determined that wages had been approved,'' the report states.
"In connection with these procedures, nothing came to our attention concerning any questionable disbursements that were potentially improper,'' the report states.
However, the report alleges, "In connection with our investigative procedures, we identified numerous instances when Leichliter and Wuebbels authorized the spending of city funds, which were either improper or excessive with questionable benefits to the city.''
Among the findings reported in the forensic audit report are:
• Journal entries — "As part of the city's internal investigation into the matters discussed in this report, all fiscal year-end 2002 journal entries were reviewed by the current city administration. They concluded that many entries made by Wuebbels were questionable and there was little or no supporting documentation.
"We determined that the entries primarily resulted in transferring a significant amount of expenses from the General Fund to the city's Capital Improvement and Park and Stormwater Improvement funds. Several material journal entries were made in round dollar amounts. In at least one instance, revenue was falsely created in order to overstate General Fund revenues. This was accomplished by journal entries made by Wuebbels, representing unapproved inter-fund activity between the General Fund and Capital Improvement Fund and Park and Stormwater Improvement Fund.''
Hochschild, Bloom & Co. had served as the city's independent auditor for five years and had performed audits of the city through fiscal 2002. As part of the firm's fiscal 2002 audit, "... certain questionabl entries were identified by the auditors and an attempt was made to reverse or correct some of these entries. However, the auditors did not expand their audit testing to review all journal entries in order to discover whether or not there were other questionable transactions. We reviewed all journal entries prepared by Wuebbels for the fiscal years ended June 30, 2001 and 2002. Based upon our procedures, we noted a pattern of manipulating the actual results of operations by fund through the use of journal entries prepared by Wuebbels.
"In fact, the documents reveal that Wuebbels himself was the sole source of verification relied upon by the auditors to validate the justification for questionable transfers made through journal entries. Therefore, the outside auditors failed to find the fiscal mismanagement because they questioned but never property tested Wuebbels' explanations of his own unsupported journal entries and transactions.
"The result of these questionable journal entries was to transfer a total of approximately $889,000 in expenses, primarily from the General Fund to the Capital Improvements Fund and Park and Stormwater Improvement Funds. The transfers totaled in excess of $600,000 to the Capital Improvement Fund and over $289,000 to the Park and Stormwater Improvement Fund.''
• Budget Matters — "Our procedures focused on the fiscal year 2002 budget recommendation and budget narrative prepared by Leichliter dated May 17, 2001. It appeared from the record that an attempt was being made by Leichliter at that time to propose to the board that the General Fund projected operating results was tied somehow to the Capital Projects Fund activities whose funds were intended to be used only for appropriated capital expenditures. This explanation was being used to justify transfers to the General Fund for funding certain operating expenses.
"It is our professional opinion that this attempt to explain the Operating Fund shortfall was misleading. This presentation served to cause the serious financial problems of the city to go unexplained to the mayor and board during a time when the city was experiencing declining sales tax revenues, decreasing reserves and extreme, predictable periods of negative cash flow.
"In reviewing minutes of board meetings, we noted that there were questions posed to Leichliter to explain his budgets in further detail. The answers provided were designed to misdirect the questions with either vague or non-responsive answers.''
In his executive summary, Greer notes that on a budget basis, the city operated at a nearly $2.5 million deficit in fiscal 2002.