State audit uncovers unauthorized loans by Gaston town clerk
By Lance Martin
The North Carolina Office of the State Auditor (OSA) is recommending a forensic audit after several findings, including the discovery that the former Gaston town clerk abused her position by authorizing loans to town employees and herself totaling $39,072.
The clerk in question is no longer employed by the town.
Town police Chief C.L. Dixon said Friday afternoon, after the audit was released Thursday, he reached out to the district attorney’s office which informed him to contact the North Carolina State Bureau of Investigation.
The audit says the OSA was informed of the allegations through its hotline and subsequently launched an investigation.
“Substantial OSA resources were required to investigate the … allegations received due to the lack of accounting records maintained by the town,” the report said. “Additionally, the annual financial statement audits for the town have been delinquent. The annual audits for four fiscal years, 2016 through 2019, were not performed in a timely manner and on average were submitted 183 days late to the Local Government Commission.”
The report says the current annual audit for fiscal year 2020 has not been completed and is currently more than six months overdue.
Because of this, the report says, “A significant risk remains that fraud, accounting errors, and inaccurate financial reporting could go undetected due to the town’s lack of internal controls, the lack of accounting records, and the delinquent annual financial statement audits.”
There are several recommendations made in the report, including the employment of a CPA to perform a forensic audit of the town’s finances.
“As noted in the executive summary, substantial Office of the State Auditor resources were required to investigate the … allegations received for the town. This was due to a significant lack of documentation to support accounting transactions posted to the general ledger. However, the … allegations may not encompass all of the errors, unauthorized transactions, or potential fraud that might have occurred.”
The report says that due to the fact that there is a significant lack of internal controls and supporting documentation, there is an increased risk of fraud; town assets being used for personal use; inaccurate financial reporting; and accounting errors.
“Without proper internal controls to safeguard from these risks, they could continue to go undetected. A forensic audit would assist the board in discovering if there is fraud, inaccurate reporting, or accounting errors.”
Further, the OSA recommends that the Local Government Commission should mandate that the board pursue this option.
The audit found the following issues:
Three town employees received $39,072 in unauthorized employee loans from 2014 to 2017, money that was not authorized in the town’s budget.
“The unauthorized employee loans were not detected because the checks for the loans were issued without adequate review. Additionally, once identified, the loans were repaid with questionable payback methods. Town policies prohibit an employee from receiving a personal and financial advantage because of his/her position with the town. Receiving unauthorized employee loans would be considered a personal and financial advantage,” the report said.
The clerk did not adequately track the loan balances and the loans were not recorded in the town’s accounting system.
In 2017, a part-time assistant clerk discovered the unauthorized loans and notified the board. At that time, she calculated the outstanding balances to be $21,270, which accounted for some repayments of the loans.
Investigators identified an error in the loan balance calculation that understated the unauthorized loans by $5,666. After the error was corrected, the total outstanding balances for the three employees were $26,936.
Once notified by the assistant clerk, the town board required the loans to be paid back immediately. However, the loans had no written agreement and no repayment terms. Therefore, the loans were repaid using questionable payback methods, specifically:
The clerk used her accrued leave balance to repay $1,851 and did not pay back $5,666 due to the loan balance calculation error which is still owed to the town. The remaining balance was repaid by the clerk via check.
A police sergeant used his accrued leave balance of $13,169 that was allegedly owed to him by the town to repay the outstanding balance on his loan.
This repayment included $9,307 of leave that exceeded the maximum allowable amount by town policy. The remaining balance was paid in cash.
A part-time officer repaid $800 by making payments ranging from $20-50 per week for 12 months before entering into a verbal agreement to paint the police department interior and the town’s baseball field restrooms to satisfy the remaining $1,120.
The audit says, as explained by the former police chief, “I was having problems getting a damn patrol car,” while the clerk was allowing employees to receive unauthorized employee loans.”
The report showed that this issue was caused by inadequate oversight by the board and was not detected for two reasons.
First, according to the clerk, several checks were pre-signed by town officials, including a member of the board of commissioners. These checks were available for use without any review since they were already signed.
The clerk stated that, “in the past, like say for instance if the check sheets are thirty to a sheet, thirty would get signed. Or either at least over half of them.”
Second, the commissioner responsible for reviewing and approving checks did not perform an adequate review. An adequate review involves verifying the expenditure is for a legitimate purpose, ensuring the expenditure was included in the town’s annual budget, and reviewing the supporting documentation.
When the commissioner was asked how many unauthorized employee loan checks he signed, he replied, “To my knowledge, I didn’t sign any of them, but I must have.”
However, after some additional inquiry, the commissioner commented that he does not perform a detailed review of the checks before signing.
He stated, “See, the clerk’s already reviewed everything… and then all I do is co-sign.”
He also stated, “It’s just in a stack of checks I’m signing, I might’ve missed – I might’ve missed those, might not have looked over it that good. Like yourself, I’m trying to get back out and go do my job. Sign what they got to do and get out.”
When the commissioner was asked what his signature represents, he stated, “Basically, from what I understand, it don’t really mean anything.”
Clerk obtained $4,410 in unallowed vacation pay
The clerk was paid for vacation leave while still working, which is in violation of town policy.
From November 2017 through February 2020, the Clerk prepared and issued 10 checks to herself for unallowable pay for vacation leave. In total, the Clerk received vacation leave pay for 350 hours totaling $4,410 while also being paid for working.
For five of the payments, the checks were approved by a commissioner, despite violating the town policy.
For the remaining five payments, the clerk prepared and processed the checks without obtaining a second signature.
Additionally, based on the clerk’s years of service, she had not earned and was not entitled to $1,826 — or 146 hours — of the $4,410 in vacation leave pay she paid herself while working for the town.
This resulted in $4,410 that was available for budgetary purposes and was caused by insufficient review.
Clerk commingled personal and town funds
The report says the clerk commingled at least $5,366 of her personal funds in the town’s bank account.
“As a result, the town was at a greater risk of fraud, such as the clerk using town funds for personal use,” according to the audit. “The commingling of funds happened and was not detected because the town board of commissioners did not develop procedures for someone other than the clerk to perform a review of the monthly bank statements, including a review of canceled checks.”
North Carolina General Statutes require the clerk to keep the accounts of the local government in accordance with generally accepted principles of governmental accounting. Commingling personal funds with town funds is not an acceptable principle of governmental accounting.
While reviewing the town’s bank account and bank statements, investigators noted that the number of payroll checks received by the clerk exceeded the number of payroll periods. There were 234 payroll periods, but the clerk received 258 payroll checks.
The audit says the clerk deposited cash received from child support payments into the town’s bank account and then wrote herself a town check to recover her funds.
The clerk explained that she took pictures of the town checks and used the mobile banking application on her phone to deposit these funds into her bank account in Virginia.
“In some instances, the town checks the clerk wrote to herself were greater than the amount of her personal funds she deposited into the town’s bank account. The clerk treated the excess amounts as unauthorized employee loans.
Further, the clerk issued 76 payroll checks without obtaining the required secondary signature.
Commissioner purchased used town equipment for approximately $2,700 below fair market value
“As a result, the town lost approximately $2,700 from the sale of the lawnmower that could have been used for the benefit of town residents,” the report says. “The town commissioners that approved the private sale of the lawnmower did not perform due diligence to obtain the fair market value of the lawnmower.”
The audit says the town’s policies and procedures prohibit seeking personal or financial gain and prohibit engaging in a scheme for personal profit in connection with official duty or city property, such as the town-owned lawnmower.
In 2009, the town purchased a Gravely 260 lawnmower for $7,490. The lawnmower was used by the commissioner as part of his job duties as a public works employee.
In 2019, the commissioner purchased the lawnmower from the town for $800.
During the July 2019 town board meeting the commissioner making the purchase stated the lawnmower would cost about $5,000 to fix.
The fair market value for a used 2009 Gravely 260 lawnmower is approximately $3,500. Investigators shared this information with the commissioner.
In response, he stated, “I just told them I’d give them $800 for it. I made the offer, they accepted it. They had full range to turn it down if they wanted to, but they accepted it.”
The commissioner also told investigators he has not paid for any repairs or parts for the lawnmower. “The commissioner stated that he uses the lawnmower regularly to cut his grass, despite telling the board that the lawnmower would cost $5,000 to fix.”
Although one commissioner attempted to maximize the proceeds of the lawnmower by suggesting a sealed bid process, the sale of the lawnmower was approved by a vote of 2 to 1. The town commissioner who made the motion for the sale of the lawnmower to the other commissioner referred to him as “his buddy.”
Town officials failed to safeguard assets
“Assets belonging to the town of Gaston were not safeguarded,” according to the report. “Specifically, vehicle and fuel card use was not monitored. As a result, there was an increased risk of misuse of town assets. Vehicles and fuel cards were not safeguarded because the town did not have written policies in place regarding vehicle and fuel card use. Guidance from the Local Government Commission requires assets belonging to the town to be safeguarded.”
The audit states the town could not give an accounting of the following:
Could not provide a complete listing of the vehicles assigned to the Public Works Department.
Did not monitor the usage of Public Works Department vehicles to ensure they were being used only for town business.
Did not require employees to complete a sign-out sheet when using Public Works Department vehicles.
Did not maintain mileage logs for Public Works Department vehicles.
Could not provide vehicle usage information including purpose, dates, mileage, and drivers of Public Works Department vehicles.
Kept keys to Public Works Department vehicles in an unlocked desk drawer in an unlocked office.
Five fuel cards that were assigned to the Public Works Department were not monitored.
Specifically, the town:
Did not assign the fuel cards to an individual or vehicle.
Did not restrict or limit employee access to the five fuel cards.
Did not require employees to submit receipts or any form of justification for fuel card use.
Did not review monthly fuel card statements, including monitoring for irregularities.
Town Attorney doesn’t dispute state audit findings
Gaston Town Attorney Geoffrey Davis said in an August 11 letter to the North Carolina Office of the State Auditor that the town does not dispute any of the findings in an audit released Thursday.
“In fact, the town hopes that the results of this audit will serve as an opportunity to correct the issues you have discovered through the process and to establish policies and procedures to prevent these situations in the future,” the letter, included in the state document says. “Moreover, the town will cooperate fully with any subsequent investigations as well as any recommendations made by the Local Government Commission in response to your report.”
The Gaston town board met August 9 and discussed the allegations in closed session, Davis said. The board authorized Davis to draft the response and also took the first steps to address the concerns in the draft report which was sent to the town on July 28.
Davis said he spoke with the assistant clerk as well as members of the board who were present in 2017 when several of the issues first came to their attention.
Davis said as far as the town can tell, the clerk knew or should have known at the time that the above actions were improper and in violation of established law, policies and procedures. “While she bears responsibility for these actions, they would have been caught much earlier had the town board exercised stricter oversight of her actions and in some cases might not have ever taken place.”
The town clerk is no longer employed and a new clerk was sworn in the evening the matter discussed in closed session. “ … I hope that this process will help to illustrate to our new clerk how to ensure best practices when she is dealing with town money. We anticipate the long-delayed 2020 annual audit will soon be delivered to the town and I have discussed the possibility of retaining a CPA to perform a forensic audit to discover any additional errors or unauthorized transactions.”
After the closed session, Davis said the town passed a motion to prohibit the clerk from signing a check to herself, even if that check is co-signed by another authorized person.
“Frankly, I was surprised that this policy did not already exist in Gaston,” he stated.
The board that evening also discussed at length their options for exercising better oversight over expenditures “and welcome any help or advice your office can provide as we continue to work through this process.”
With respect to the clerk, Davis said, “I believe that we must make an effort to recover these funds but I am waiting until this report is made public before I take action.”
Regarding the transaction involving a town commissioner who who purchased a town mower below fair market value, Davis said, “I believe the facts are exactly as you state, however, I would like to add the following qualification — the commissioner who purchased the lawnmower did not participate in the vote that authorized the private sale.”
The attorney said he believed at the time the board was focused on provisions of state statutes which allow private negotiations and sales for personal property valued under $30,000.
However, Davis said, the board “failed to ensure the offer made by the purchasing commissioner was in line with the fair market value for that asset. I have explained to them how, in light of your findings, this transaction deprived the town of an offer that potentially would have been closer to the fair market value. Additionally, I have explained to them that this situation was made more problematic by the fact that a commissioner was the purchaser in question.”
Davis said in the future he doesn’t believe the current board will attempt to dispose of assets in this fashion.
“I have advised them they need to make an effort to obtain fair market value for any town assets they dispose of, even when said disposition occurs under (North Carolina General Statutes),” he said.
Finally, Davis wrote, “I am surprised that the town could not provide a current listing of public works vehicles. This should be relatively easy to remedy and in the future the town should endeavor to keep better records. They should also endeavor to keep better track of their use of vehicles and fuel.”
(Lance Martin is the Editor and Publisher of www.rrspin.com. Permission was obtained to publish this story.)