Conroe, March 19 – Precinct 2 Commissioner Charlie Riley’s befuddlement over his own Precinct budget and County Auditor Phyllis Martin’s conflicts of interest and in appropriate involvement in political issues were on public display in the March 14, 2017, and other recent Commissioners Court meetings. Martin’s actions were particularly disconcerting since the County government and the citizens depend on her to audit the County’s finance objectively.
Riley, Doyal, Meador drawing County Auditor into conflicts of interest
Riley, County Judge Craig Doyal, and Precinct 1 County Commissioner Mike Meador are increasingly drawing the County Auditor into political matters rather than permitting her to act as an auditor reviewing County finances and as an objective chief budget officer. On more than one occasion, the Board of District Judges, who appointed Martin and are to oversee her conduct, have warned her about avoiding entanglements in political activities inside the County government.
Martin’s conflicts of interest and her entanglement in County government operations have become apparent during the last three County Commissioners Court meetings. Riley, Doyal, and Meador have encouraged such conduct.
At the March 14, 2017, Court meeting, County Judge Doyal explained to his colleagues and the public the lack of progress in finding a replacement for County Purchasing Director Darlou Zenor, a member of Doyal’s “Hit List” who Doyal fired during the autumn of 2016. Doyal mentioned that approximately thirty applicants are seeking the job and that he’s reviewing those applications along with Riley, County Human Resources Director Dodi Shaw, and his “chief of staff” jim fredricks. Then Doyal quietly dropped the bombshell that Martin, the County Auditor, is also involved in this hiring process, a function wholly outside of anything an auditor should do.
How should government auditors act under Generally Accepted Accounting Principles
Montgomery County’s government operations also face an enormous challenge in the manner in which the Commissioners Court keeps its financial records, audits those finances, and prepares its budget, because those functions all fall under the same person, Martin, which violates numerous accounting principles.
Later, during the same meeting, Martin provided four Auditor reports and provided an analysis of those reports the gist of which was “ignore the written financial reports which the County maintains.”
Martin’s first report during the March 14 Commissioners Court meeting was not a problem, because she merely provided a one page summary of the sources of “revenue” in the County’s Budget, a set of numbers that every member of the Commissioners Court should already have known. Martin noted that approximately 71.5% of the County’s budget comes from the collection of ad valorem taxes, after County Judge Craig Doyal asked her that obviously-rehearsed question.
Martin’s explanation of her second report is where her political entanglements began to show. That report involved the amount of unspent budget funds each year by department. Martin cautioned the Court and the public not to treat “these numbers as…relevant or helpful.” She admitted that she and her staff had spent time inside the County Auditor’s Department “brainstorming in the office why this report should not be taken at its face.”
Martin attempted to obfuscate some of the most important numbers in the unspent budget funds report, the amounts of money budgeted for which taxes are collected, but constitute unspent salaries. Martin never explained what her rationale could possibly be for providing a report to the Commissioners Court but then knocking that same report down as irrelevant and unhelpful. If such reporting has no purpose, in Martin the auditor’s opinion, then she has some explaining to do why the County should even spend money to maintain such data. Of course, the reality is that the unspent budget numbers are very important and provide very useful information, but also constitute data that the pro-government spending County Judge and Commissioners don’t want the public to consider.
At this point in the Commissioners Court meeting, Commissioner Charlie Riley showed how lost he is when he enters the thicket of County finances. First, in what seemed a rehearsed comment, Riley noted a “prime example” of failing to spend his budget when he noted that in 2015, out of a $476,000 asphalt budget, he spent less than ten percent (10%) of it. Riley said, “I couldn’t get to it that year,” obviously admitting his failure to maintain and construct roads in his Commissioners Precinct.
Riley continued, “In 2013, we [referring to himself as Operations Manager of Precinct 2 at the time] were allocated $1.5 million on August 12, but I don’t know what the budget account was…but I just want everyone to understand…you can’t just take the numbers…you can’t call these slush funds.”
Martin’s additional “reports”
Martin presented two other “reports” on March 14. The first was the list of vacant positions, a report which, surprisingly, was identical to a report prepared in the County Human Resources Department four weeks earlier but for which Martin took credit. Once again, the County Auditor noted that she and her office staff “brainstormed why we should look at the report in detail…not take the numbers seriously.”
Clearly, Martin, on behalf of the pro-government spending Riley and Doyal, sought to advocate larger County government spending budgets, even though the County is not spending large portions of the tax dollars it collects.
The most frightening report of Martin’s was her final one concerning a 2012 Certificate of Obligation – a loan – which the County received. Martin noted that the loan’s intent was to make some capital improvements which “never came to fruition and which the county doesn’t anticipate using because the projects were not completed for lack of a better word.”
Martin then presented the tax expenditure equivalent of an “Easter basket” to the County Judge and Commissioners: “I’ve brought you these funds, $3.5 million, you could utilize these funds for large capital projects…rather than spending your budgets.”
Neither Martin, Riley, Doyal, or any person in the meeting – remember, lowly citizens cannot speak during the “deliberations” of the Commissioners Court – considered the idea of taking the $3.5 million of available funds and paying down the County’s debt in order to reduce interest expenses.
Earlier meeting conflicts of interest
During the past two Commissioners Court, Riley and Doyal have attempted to draw Martin into their political web. At the February 28, 2017, meeting, Doyal established a secretive “budget committee” consisting of himself, Martin, and Commissioner Mike Meador. Doyal has made clear that the committee will not examine departmental budgets or examine line-by-line expenditures. When Commissioners Jim Clark and James Noack requested that the entire Commissioners Court fulfill these functions, Doyal, Martin, and Meador made clear that they would prefer the backroom dealing on such matters.
During the February 14, 2017, Martin almost got herself into serious trouble with the Board of District Judges. Doyal and fredricks placed on the agenda that they intended to appoint Martin as the Treasurer of the Montgomery County Toll Road Authority (“MCTRA”), a position wholly outside of her functions as County Auditor and, since the MCTRA borrows enormous sums of money from the County, would place her in a direct conflict wherein she’d have a fiduciary duty both to MCTRA as an officer and to the County, MCTRA’s lender. Fortunately, at the last minute, Martin removed herself from consideration for the MCTRA office.
Why Martin’s conflicts of interest are so serious
Local governments apply the United States Government Accountability Office’s Government Auditing Standards (the “Yellow Book”) in conducting audits, because the American Institute of Certified Public Accounts and the United States Office of Management and Budget’s Circular A-133 now establish the Yellow Book as the Generally Accepted Accounting Principles (“GAAP”). Since the County’s bond ratings and valuations often depend upon successful audits, adherence to the Yellow Book is important.
The County Auditor, who also acts as the Chief Budget Officer of the County, prepares the financial statements for the County. She audits her own books and accounts. The outside auditor under the procedures which Riley, Doyal, Meador, and Martin have established then only tests those books and accounts for their accuracy rather than conducting a full audit. The outside auditor does not check conformance of actual expenditures to the budget that the Commissioners Court approved. Rather, the outside auditor only tests whether the reported financial statements accurately reflect actual expenditures and the actual balance sheet (assets and liabilities) of the County.
As County Auditor Martin stated on November 17, 2016, in response to a Public Information Act Request:
“Barring the annual financial report, which is compiled by the Auditor’s Office and audited by an independent audit firm, such as Weaver, there is no other single document reporting an audit of the entirety of Montgomery County, Texas, for a specific point in time. Audits are performed regularly, on a much smaller scale, for individual functions, such as the cash counts referenced above.”
The dual role of the County Auditor creates a serious problem in Montgomery County. She acts as the budget officer who establishes the budget and maintains the financial books and records of the County and then also audits those same books and records, which she prepared. In other words, the Auditor must audit herself. She reports her audit to herself.
These procedures violate dozens of the GAAP rules in the Yellow Book. Two Yellow Book Sections immediately come to mind:
- 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.
This County is in a serious mess. We don’t have an auditor who acts with independence. We lack at least three members of the Commissioners Court (Riley, Doyal, and Meador) who either don’t understand the County’s finances or purposefully seek to obfuscate them.