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Crestwood receives 'clean opinion' for fiscal 2003 audit, aldermen told

An independent audit of Crestwood's finances for fiscal 2003 has resulted in a "clean opinion,'' a representative of the city's independent auditing firm recently told the Board of Aldermen.

Larry Pevnick of Brown Smith Wallace presented the Comprehensive Annual Financial Report for fiscal 2003 to the Board of Aldermen last week.

"... It is a clean opinion, which means that we feel that there's a fair presentation of the financial statements now, that they're free of material misstatements or errors and that it's a clean opinion and the numbers are now fairly stated in accordance with all the accounting rules and regulations,'' Pevnick said March 23.

The city had fiscal 2003 expenditures of $9,353,115 with revenues totaling $8,454,967 — a shortfall of $898,148. Because the city began fiscal 2003 with a negative balance of $973,497, the general balance at the end of the fiscal year on June 30 was $1,871,645.

The Board of Aldermen voted in October to approve an ordinance selecting Brown Smith Wallace as the city's independent auditing firm. Besides performing an audit for fiscal 2003, the scope of work to be performed by the firm included restating the city's financial statements for fiscal 2001 and fiscal 2002.

Brown Smith Wallace is the same firm that performed a forensic audit of the city's books for fiscal 2001 and fiscal 2002.

The forensic audit alleges that two former Crestwood officials violated the City Charter, numerous ordinances and their duties as fiduciary officers in their handling of the city's finances.

In November, the city filed a lawsuit in St. Louis County Circuit Court alleging that former City Administrator Kent Leichliter and former Finance Officer Robert Wuebbels breached their fiduciary duties by manipulating financial records to misrepresent the city's true financial condition to former Mayor Jim Robertson and the Board of Aldermen. The lawsuit also alleges professional negligence and breach of contract by Hochschild, Bloom & Co., which served as the city's independent auditing firm from 1998 to 2002.

On Jan. 27, aldermen accepted the restated financial statements for fiscal 2001 and fiscal 2002. The restated financial statements for fiscal 2001 resulted in a general fund deficit of $204,072 instead of the previously reported positive fund balance of $45,928, while the restated financial statements for fiscal 2002 resulted in a general fund deficit of $973,497 instead of the previously reported positive fund balance of $132,334.

During a March 20 work session, aldermen discussed the general fund deficit of $1.871 million at length and and learned from City Administrator Don Greer and Director of Finance Diana Madrid that $1 million of that deficit resulted from the board's establishment of an internal service fund that was to contain $1 million.

However, Brown Smith Wallace reported in the forensic audit, "The money earmarked for the internal service fund was never set aside other than in effect set up as a memorandum entry.''

In response to a question, Madrid said March 20, "The $1 million internal service fund is carried as an asset on the city's financial statements. If the board chose to keep $1 million as that asset, the general fund would owe the internal service fund $1 million. If the board chooses to wipe off or eliminate that $1 million, then the general fund fund balance at June 30, 2003, would be a negative $871,000.''

During a March 27 work session, aldermen indicated they would like to eliminate the internal service fund and thereby reduce the general fund deficit by $1 million to $871,000. Based on aldermen's comments, Greer said he would have City Attorney Rob Golterman draft an ordinance eliminating that fund for the board's consideration.

During the March 23 board meeting, Ward 1 Alderman Richard LaBore asked Pevnick about the impact of the city's financial problems.

"... If you have a feel for this, granted the amount of effort that this board and this staff have done to identify the problem, take steps to correct it, including the use of your firm, do you envision any negative impact on the city's credit rating because of the last year, year and a half, and any significant damage to the city's reputation as being fiscally responsible?'' LaBore asked.

Pevnick said, "Well, it's a difficult question to answer ... it's a couple-part question. As far as credit, this financial statement will be submitted. What most creditors will want to see is obviously a plan going forward. I think a lot of the reasons for the condition of the city have been basically disclosed to this board and the public in terms of some of the reporting in the past, in terms of some of those practices that were not ... complete and accurate.

"And I think most people that read both this document and prior documents will take that into consideration. I don't think it's permanent damage. I think there still will be some questioning going forward of whether or not the city has got its shop in order, so to speak, but I don't see that being a long-term hurdle. It's really a short-term hurdle, just re-educating people that proper systems and controls have been put in place now, proper budgeting going forward will be put in place and the city over a course of the years will repair and replenish its funds and you just go forward,'' Pevnick added.

Referring to a forthcoming management letter Brown Smith Wallace will submit to the city, Ward 3 Aldermen "Bernie'' Alexander later asked Pevnick, "... In the management letter that you're going to address to the city administration, will you address any shortfalls in our internal controls as a city?''

Pevnick said, "Oh, absolutely. That's definitely included in our letter. What we do as part of the audit is we study the internal control systems and procedures and any sort of refinements or tweaking of that system will also be in that letter, absolutely. Some of it's been implemented already.

"We've had a number of discussions about setting up separate bank accounts, obviously, for special tax funds and things like that. So there's a good deal in there that we'll report that's already been implemented, which is also good ...,'' he added.

In a letter of transmittal to Acting Mayor Richard Breeding, the Board of Aldermen and Crestwood citizens, Greer and Madrid noted that for 23 consecutive years — from 1980 through 2003 — the city had received the Certificate of Achievement for Excellence in Financial Reporting for its Comprehensive Annual Financial Report from the Government Finance Officers Association.

"Due to material misstatements and fraudulent activity that was discovered during the course of a forensic audit, GFOA's director of technical services conveyed that the city would no longer qualify for this recognition for fiscal years 2001 and 2002,'' Greer and Madrid wrote.

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