Conroe, March 28 – County Auditor Phyllis Martin, named the “eighth most powerful person in Montgomery County” at the end of 2016, received “The Golden Hammer Award” at the March 28, 2017, County Commissioners Court meeting. Martin has cost County taxpayers tens of millions of dollars and looks to cost many tens of million more in coming months.
Martin is a very competent and intelligent lady. She’s got a lot of knowledge in her field. In other words, she should know better that the terrible things which she does. Martin has received recognition from the Texas Association of County Auditors (“TACA”) of which she currently serves as president.
TACA’s cute motto is “In God we trust; all others we audit.” Sadly, Martin’s motto ought to be, “In God we trust; all others, except Montgomery County politicians, we audit. Montgomery County politicians we only pretend to audit.”
Auditors are supposed to check others to make sure they’re in compliance and doing the right thing. Martin has wholly failed. In her own job, as The Golden Hammer noted during the presentation of her Award on Tuesday, Martin doesn’t follow accounting standards or her duty to act independently of the politics of the County government.
The Golden Hammer had to complain to the County Commissioners and Board of Judges to prevent Martin a few weeks ago from accepting an appointment as treasurer of the so-called Montgomery County Toll Road Authority, a position which would have put her into direct conflict with her job duties as auditor.
On March 28, Martin presented some so-called “budget models” that were little more than pro-County spending propaganda for the big spending County Judge Craig Doyal and Precinct 1 Commissioner Mike Meador to try to scare voters into believing that the County shouldn’t cut government spending, give law enforcement departments the increased funding and resources they need, and provide a 20% homestead exemption to overburdened property taxpayers. Those so-called “models” failed even to consider the data which County Tax Assessor-Collector Tammy McRae had presented on February 14 during an open Commissioners Court meeting where McRae projected gigantic increases in taxable property values that would make spending reductions, increases in law enforcement, and the homestead exemption that much easier.
Martin’s “budget models” were anti-conservative garbage.
Martin has failed to follow generally accepted accounting practices as set forth in the “Yellow Book” of the U.S. Government Accountability Office. Primarily, Martin has failed to follow the dozens of anti-conflicts of interest rules in those accountings standards, particularly when she injects herself into politics at almost every County Commissioners Court meeting.
Martin’s violations of accounting standards and statutory rules include the following among others:
Section 3.31. Internal Auditor Independence – GAAP requires the internal auditor to be located organizationally outside the staff or line-management function of the unit under audit. Furthermore an audit must be sufficiently removed from political pressures to conduct audits and report findings, opinions, and conclusions objectively without fear of political reprisal. In this instance, however, the County Auditor works closely with the Commissioners Court on a regular basis for budgeting purposes. She sits with the Commissioners Court at their regular meetings. The Commissioners Court sets her salary, which is substantially higher than every county auditor in Texas with the exception of Harris County. The County Auditor regularly meets with individual Commissioners Court members (the County Judge and Commissioners) to work with them to establish their department budgets. These meetings occur on an ongoing basis. There clearly is a political relationship with the County Auditor because she not only audits but works on the budget side of the accounting ledger. There is not sufficient independence between the internal auditor and the Commissioners Court under GAAP scrutiny.
Section 3.35. Nonaudit Work by Auditor. – The Yellow Book makes a major point: “If an auditor were to assume management responsibilities for an audited entity, the management participation threats created would be so significant that no safeguards could reduce them to an acceptable level. Management responsibilities involve leading and directing an entity, including making decisions regarding the acquisition, deployment and control of human, financial, physical, and intangible resources.” The County Auditor has assumed significant management responsibilities for Montgomery County. She sits with the Commissioners Court, interrupts meetings regularly, injects her opinions and her department’s policies as policy guidance for the Court, and supervises the individual Court members in budgeting. As Chief Budget Officer of the County, the County Auditor has direct management responsibilities under the Texas Local Government Code. One cannot criticize her for fulfilling these duties but the dichotomy of her role as Chief Budget Officer and as County Auditor has created this major conflict of interest that suggests the necessity of an independent internal audit of the County’s finances.
Section 3.36 provides the following examples of practices, which constitute exercising management responsibilities for the audited entity, in which such practices the Montgomery County Auditor engages:
“…setting policies and strategic direction for the audited entity”;
“directing and accepting responsibility for the actions of the audited entity’s employees in the performance of their routine, recurring duties”;
“reporting to those charged with governance on behalf of management”;
“accepting responsibility for designing, implementing, or maintaining internal control”; and
“providing services that are intended to be used as management’s primary basis for making decisions that are significant to the subject matter of the audit”.
Section 3.49 states: “If performed on behalf of an audited entity by the entity’s auditor, management responsibilities such as those listed in paragraph 3.36 would create management participation threats so significant that no safeguards could reduce them to an acceptable level. Consequently the auditor’s independence would be impaired with respect to that entity.”
Section 3.38 makes the critical point: “In cases where the audited entity is unable or unwilling to assume these responsibilities…, the auditor’s provision of these services would impair independence.” Clearly, the Montgomery County Auditor’s assumption of the foregoing services, whether by statutory requirement or by practice of Montgomery County, impairs her independence as an auditor and suggests the need for an audit that is truly independent.
The Government Auditing Standards recognize there may be situations where an internal auditor, due to statutory requirements, cannot avoid engaging in certain management responsibilities. In those instances, however, the internal audit and the outside audit must disclose the nature of the threat, which could not be eliminated. None of the Fiscal Year 2013, 2014, and 2015 audits disclose those threats. Therefore, they fail to comply with this important Standard under GAAP.
Section 3.50 of the Government Auditing Standards holds that some services involving preparation of accounting records always impair an auditor’s independence with respect to an audited entity. The services listed under Section 3.50, in which the Montgomery County Auditor engages, include:
“a. determining or changing journal entries, account codes or classifications for transactions, or other accounting records for the entity without obtaining management’s approval;
“b. authorizing or approving the entity’s transactions; and
“c. preparing or making changes to source documents without management approval. Source documents include those providing evidence that transactions have occurred (for example, purchase orders, payroll time records, customer orders, and contracts). Such records also include an audited entity’s general ledger and subsidiary records or equivalent.”
The fundamental violation by Montgomery County and the County Auditor of Government Auditing Standards appears in the contrast between the County’s practices and Section 3.51 of the Yellow Book: “3.51 Management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework, even if the auditor assisted in drafting those financial statements. Consequently, an auditor’s acceptance of responsibility for the preparation and fair presentation of financial statements that the auditor will subsequently audit would impair the auditor’s independence.” In summary, the County Auditor violates GAAP by auditing her own financial books and records.
Section 3.88 of the Yellow Book requires outside auditors, such as Hereford Lynch, to create internal policies in order to ensure independent practices and ethics, including written policies for audits. Hereford Lynch, the outside auditor, failed to disclose its internal policies for maintaining such independence. There is, however, a significant shortcoming in the 2013, 2014, and 2015 audits with respect to the outside auditor’s observations. Sections 4.07 and 4.08 require an outside auditor to detect financial abuse within the County government for personal or family gain and also to identify corrective measures. Section 4.07 explicitly notes that such abuse includes “misuse of authority or position for personal financial interests of those of an immediate or close family member or business associate.” Instances of such abuse include the following inside the Montgomery County government and none of which the supposedly outside and independent auditor has detected or identified within the 2013, 2014, or 2015 audits:
- Bobby Adams. Mr. Adams is a close business associate of County Judge Craig Doyal. They co-own at least two businesses together. Mr. Adams is the representative of Halff & Associates, a major county contractor the county contracts for which Doyal regularly votes.
- Lindsey Doyal. Ms. Doyal is an employee of Montgomery County who works in the County Treasurer’s Office as a Payroll Coordinator. Her father, County Judge Craig Doyal, regularly votes for the department budget, which includes her salary, $60,983.42. Furthermore, the County Commissioners regularly vote, by consent, for all county employee salaries. Doyal does not recuse himself.
- Craig Case and the Wright family. Craig Case is an employee of Montgomery County and the son of Paul Case, the director of Montgomery County’s Building Maintenance Department. Craig Case works as an unlicensed welder for the HVAC section of the Building Maintenance Department and receives a salary of $91,706.77, far higher than a person of comparable skills or seniority would receive as an employee of that department. His direct supervisor is his father. In order to skirt the obvious nepotism, Craig Case is officially assigned to the County Engineer. His business card, however, lists the address of the Building Maintenance Department on Airport Road. The Wright family has three immediate family members who work together in the Building Maintenance Department, including Mr. Wright who is the deputy director of the department with a salary of $93,980.93. His wife, Leslie Wright, is the Officer Manager with a salary of $54,979.07. Their son Adam is unlicensed in any field but works on a field crew with a salary of $50,135.37.
- Jule Puckett. Ms. Puckett is an administrative assistant who receives $54.93 per hour. Even though she should be classified as an exempt employee, Commissioner Mike Meador has classified her as nonexempt so that she may earn the maximum overtime per year of 248 hours, which she regularly receives from year to year. During FY 2016, Ms. Puckett received over $130,000 in compensation as an administrative assistant. Comparable salaries in other Commissioner’s offices are approximately one-third of that amount. Ms. Puckett was a close childhood friend of Janie Meador, Commissioner Meador’s wife. They have remained close friends into adulthood.
- Suzie Harvey, the Elections Administrator and head of the Elections Department, is the biological sister of County Auditor Phyllis Martin. Ms. Martin audits Ms. Harvey, her sister, and assists the Elections Department with its budgeting, accounting, and bookkeeping.
Under sections 4.07 and 4.08 of the Government Auditing Standards, the County’s internal auditor, Ms. Martin, should bring the foregoing examples of abuse (as defined in the Yellow Book) to the attention of the external auditors, Hereford Lynch. Ms. Martin has not carried out that practice. Under section 4.08, upon receiving information about these family and business associate abuses, it would be the duty of the external auditor to investigate nepotism abuses and similar circumstances. Clearly, such an investigation has not occurred.
Section 4.19 of the Government Auditing Standards mandates: “When providing an opinion or a disclaimer on financial statements, auditors should also report on internal control over financial reporting and on compliance with provisions of laws, regulations, contracts, or grant agreements that have a material effect on the financial statements. Auditors report on internal control and compliance, regardless of whether or not they identify internal control deficiencies or instances of noncompliance.” None of the 2013, 2014, or 2015 independent audits contain reports on (1) internal controls over financial reporting, (2) compliance with provisions of laws, regulations, contracts, or grant agreements that have a material effect on the financial statements, or (3) internal compliance or controls. This shortcoming reflects a major deficiency in the County’s compliance with the Yellow Book and GAAP. These problems constitute deficiencies under sections 4.23 and 4.24 of the Yellow Book as well.
Under 5.02 of the Yellow Book, the outside auditors of the County perform an attestation engagement at the review, rather than the examination, level. Even review level engagements, however, must comply with the requirements to test legal compliance and test for fraud. The outside auditors who prepared the FY 2013 through 2015 audits failed to address these issues entirely, in violation of sections 5.02, 5.07, and 5.08 of the Yellow Book.