MAJOR HISTORIC BREAKING NEWS STORY!
PUBLISHER’S NOTE: Eric Yollick, Publisher of The Golden Hammer, Montgomery County’s leading daily newspaper, recused himself from the preparation, writing, and editing of this article.
GEOFFREY A. LITKE, The Golden Hammer
Conroe, May 26 – For the first time in the history of the State of Texas, 435th District Court Judge Patty Maginnis issued an order appointing a Committee on Finance pursuant to Section 115.033 of the Texas Local Government Code and called for an independent audit of all Montgomery County books and records. Maginnis appointed a three person Committee on Finance consisting of Landon Estay, Brenda Webb, and James E. Wiggins, accountants who will work independently and receive total compensation of $15 each for their services (in accordance with the Texas statute enacted long ago when that seemed like a lot of money and when county finances were far simpler).
Judge Maginnis’ order arose after two private citizens – Bill O’Sullivan, who is a longtime political activist and Treasurer of the Texas Tea Party Patriots PAC, and Eric Yollick, a private citizen who is the Publisher of The Golden Hammer – testified to the Grand Jury of Montgomery County on February 9, 2017. O’Sullivan and Yollick testified to the Grand Jury after Yollick had presented a detailed written report concerning major financial problems involving the method of audits and budgeting in Montgomery County to the Board of District Judges on Friday, December 2, 2016.
O’Sullivan has complained about the failure of the Commissioners Court to budget tens of millions of dollars that the Commissioners Precincts spend out of “slush funds” in their accounts. Those funds are wholly outside of the County Budget approved in September of each year. The Commissioners Court then spends those funds improperly through secretive budget “amendments” allegedly based upon “emergencies…[which are] grave public necessities…” They never have identified what the “emergencies” are.
Yollick has complained about the failure of Montgomery County ever to conduct truly independent audits in accordance with the Generally Accepted Accounting Principles which the United States Government Accountability Office (“GAO”) has promulgated and approved as Accounting Standards by the Government Accounting Standards Board (“GASB”), a private accounting trade group. “The fundamental problem in Montgomery County is that the County Auditor acts as the chief budget officer, the bookkeeper, and the auditor. Basically then, she audits herself. To make matters worse, the supposedly ‘outside’ audits by firms, such as Weaver and Tidwell, are not full examination audits but instead merely test audits where they essentially take the County Auditor’s annual financial report, bless it, and slap an opinion at the front of it, while charging the County $60,000 for those ‘services.'”
“The fundamental problem in Montgomery County is that the County Auditor acts as the chief budget officer, the bookkeeper, and the auditor. Basically then, she audits herself. To make matters worse, the supposedly ‘outside’ audits by firms, such as Weaver and Tidwell, are not full examination audits but instead merely test audits where they essentially take the County Auditor’s annual financial report, bless it, and slap an opinion at the front of it, while charging the County $60,000 for those ‘services.'” – – Eric Yollick, Private Citizen
The Golden Hammer has provided extensive coverage about the lack of independent auditing and the failure to follow GASB accounting standards within the Montgomery County government. Please see “Rep. Keough Hails Passage of Major Transparency Legislation Bill To Require County Auditors To Follow Accounting Standards,” The Golden Hammer, April 25, 2017. (Much of Yollick’s report to the Board of District Judges is contained in that article as well as in some of Yollick’s Facebook posts that predated the birth of The Golden Hammer on January 14, 2017.) The article concerning GASB standards is reprinted below for the convenience of readers.
Yollick added, “Several months ago, I mentioned an ‘October Surprise’ in comments before the Commissioners Court. Seeking the appointment of a Committee on Finance to conduct an independent audit is the ‘October Surprise’ to which I referred. Obviously, the process took a bit longer than I had anticipated. I want to thank the wonderful citizens of the Montgomery County Grand Jury, District Attorney Brett Ligon, and 435th District Judge Patty Maginnis for their superb and hard work on this matter.”
In response to a press release which County Judge Craig Doyal issued yesterday afternoon saying that he intended to cooperate with the Committee on Finance, Yollick said, “I would hope Doyal cooperates as should the entire County government. We need an independent audit. I’m hopeful that they won’t find any irregularities, although my report to the Board of Judges found some serious problems, necessitating this independent audit.”
I became concerned about this situation back when “Barb” Sadler was Judge. In August, just before a new budget went into effect, “IT” presented an invoice for a “Software Update” that was about $1 Million followed by the all too frequently used, “Name a funding source”. It seemed extremely odd to me that an expense of that size would not be budgeted. “Barb” wisely asked if the execution of the order could be delayed a few weeks so that it could be part of the new budget. At that point, the Sales Representative for the Software Vendor stood up and advised that if we delayed the order, we would miss out on the “sale”. I have heard “sales forcing techniques” before and dismissed this effort. The item didn’t pass at the time. About ten minutes later the Auditor announced that they had “found” the money unspent from prior years. In other words, the taxpayers had sent the money in and if unspent, the politicians were keeping it even though not needed for budgetary purposes. Therefore the new Budget would be built from a higher base than was needed. Over time, I also found out that the various “Road and Bridge Funds” were routinely tapped for non-“Road & Bridge” needs. The importance of the restricted use of those funds cannot be overemphasized for not only our Maintenance and Operation (M&O) needs, but also for expanding Mobility without Bonding. I found out that a Grand Jury could force an audit and pursued that approach testifying in support of Eric’s request. Our Road efforts are about twenty years behind needs. Unless we accelerate the importance of Mobility and M&O upkeep, the attractiveness of Montgomery County for business development will recede further burdening homeowners. There’s lots more to this but the County is a $400 Million annual operation requiring a full audit according to GAAP and accounting for not only proper budgeting but properly spending that budget instead of “rat holing” it for a “Slush Fund”.
Judge Maginnis’ Order
Judge Maginnis’ Order, dated May 18, 2017, became public on Friday, May 26, 2017, around 7:45 p.m, when her Court Clerk circulated the Order to the entire Montgomery County Commissioners Court. The Order provides:
“On January 5, 2017, a Grand Jury was duly selected, empaneled, sworn, charged, and organized as such by the 435th District Court. During the Grand Jury term, Mr. Eric Yollick, a citizen of Montgomery County, Texas, requested of the Montgomery County District Attorney that he be allowed to make a presentation to the Grand Jury. Mr. Eric Yollick did make a presentation to the Grand Jury. On February 16, 2017, the Grand Jury issued a written report, pursuant to Texas Local Government Code…[Section] 115.033, that this Court appoint a finance committee to examine the financial condition of Montgomery County. The Grand Jury’s written request did not suggest individuals for the three person committee, leaving the appointments to the discretion of the judge. The written request was issued during the tax season, at a time when most statutorily qualified individuals [accountants] were exceptionally busy and would be continue to be busy through the month of March, April, and May. The Grand Jury requested to be held over for the purpose of allowing the Court to find statutorily qualified individuals willing to accept the appointed positions and for receipt of the statute-required written report from the finance committee.
“The Court made inquiry of no less than ten individuals to determine if they were qualified for appointment pursuant to the statute, including individuals that were suggested by Mr. Eric Yollick. The Court found that some of the individuals were not qualified according to the statute, and/or did not respond to the Court’s inquiry.
“In accordance with the written request of the Grand Jury and Texas Local Government Code…[Section] 115.033, the Court hereby appoints a finance committee to examine the financial condition of Montgomery County. The committee shall be composed of the following three individuals: Landon Estay, Brenda Webb, and James E. Wiggins, who are (1) citizens of Montgomery County, (2) of good moral character and intelligence, and (3) experienced accountants.
“The committee shall examine all of the books, accounts, reports, vouchers, and orders of the Commissioner’s Court relating to county finances that have not been examined and reported on by a previous committee. [AUTHOR’S NOTE: THERE HAS NEVER BEEN A PREVIOUS COMMITTEE.]
“The committee shall count all the money in the office of the county treasurer that belongs to the county and shall make other examination that it considers necessary and proper to determine the true condition of the county finances. If necessary, on application of the committee, the Court shall send for persons and evidence to help in the investigation.
“On the earliest practicable day after its appointment, the committee shall make a detailed written report to the 435th District Court. The report must:
- State whether the books and records required by law are correctly kept;
- Fully set out the financial condition of the county and the state of each officer’s account; and
- Specify any irregularity, omission, or wrongdoing that the committee discovers.
“The committee shall sign and swear to the report and file it in the office of the district clerk. The district clerk shall deliver a file-stamped copy of the written report to the Grand Jury as soon as practicable after the filing.
“Each member of the committee shall receive compensation for services performed at the rate of $3.00 per day. The compensation shall be paid for a period not to exceed five days and shall be paid from the county treasury upon certification by this Court that states the number of days the member served.
Signed: May 18, 2017.
/s/Honorable Patty Maginnis, 435th District Court”
Doyal’s, Davenport’s politicking to try to make them look cooperative
Doyal’s press release included comments from his close political ally, County Treasurer Stephanne Davenport. Davenport’s husband works for both the County Treasurer and has represented Doyal in the past as well. The County Treasurer employs Doyal’s daughter and attempted to promote her to Assistant County Treasurer in a controversial move that she eventually withdrew after complaints from the leaders of the County’s Human Resources Department Dodi Shaw, Director, and Kathy Flowers, Assistant Director. The kerfuffle resulted in Stephanne Davenport’s fiery comments to the Commissioners Court on March 14, 2017, in which she criticized the Human Resources Department for a “huge lack of integrity” at the same time Davenport refused to identify who had actually drafted the documents, which said Davenport herself had prepared them, that suggested the County Judge’s daughter for the nepotistic promotion.
Nepotism is one of the issues which Yollick raised in his report to the Board of District Judges and specifically mentioned the hiring of the County Judge’s daughter within the County Treasurer’s office.
Stephanne Davenport said, “It is an excellent committee. I look forward to working with them in every way possible.” “We are blessed to have such capable people willing to do this service for their county,” the intensely political County Treasurer added.
The following is a reprint of an earlier article concerning some of the issues contained in the foregoing article.
Rep. Keough Hails Passage Of Major Transparency Legislation Bill To Require County Auditors To Follow Accounting Standards
Austin, April 25 – State Representative Mark Keough (R-The Woodlands) hailed the passage of House Bill 1930 as “major transparency legislation that will force counties to comply with national accounting standards.” The short and simple piece of legislation requires that county auditors, such as Montgomery County Phyllis Martin, in counties with a population that exceeds 190,000, must conform their auditing rules and regulations to “generally accepted accounting principles.” The legislation amends Section 112.002 of the Texas Local Government Code which permits county auditors to adopt regulations for audits in their respective counties.
HB 1930 passed the Texas Senate on April 19, 2017, by a unanimous vote of 31 to 0. The Senate bill’s language is identical to that of HB 1930, which passed on a second reading in the Texas House yesterday afternoon at 3:53 p.m. The House unanimously approved this major legislation and will finalize the passage with a third reading and final vote during the day today. After that vote, the bill will proceed to Governor Greg Abbott whom Keough expects to sign the law swiftly so that it will become effective immediately.
The bill is the brainchild of Lubbock Representative John Frullo, a certified public accountant who runs his own printing business. Frullo, a longtime Republican activist and Tea Party favorite, wrote the legislation after he observed the odd methods by which county auditors attempt to obfuscate financial statements so that citizens cannot get a realistic picture of the financial condition of most county governments. Frullo asked his legislative colleague, Charles Perry, a Republican State Senator also from Lubbock, to author the proposal in the Senate.
Keough noted that “county financial statements are especially hard to read when it comes to the way they report contingent liabilities and future liabilities relating to employee benefits. One of the main purposes of the bill is to that citizens and public employees, who deserve this information, can be aware of the financial health of the entities which represent them or for which they work.” Keough said, “this bill requires counties to provide a clean audit.”
The case of Montgomery County: external and internal audits lack independence, in contravention of Government Accounting Standards.
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 bond ratings and valuations often depend upon successful audits, a local government’s adherence to the Yellow Book is important. The citation for the Yellow Book is Comptroller General of the United States, Government Auditing Standards: 2011 Revision (Washington, D.C.: United States Government Accountability Office, 2011). Internet: http://www.gao.gov/assets/590/587281.pdf.
The audits of Montgomery County are not full audits but rather test audits. The outside auditor, currently Weaver and Tidwell, L.L.P., performs a test audit only by conducting tests of the accuracy of information which the county has reported rather than confirming that all information is accurate. See, e.g., Letter from Weaver and Tidwell, L.L.P., dated August 31, 2016, to the Honorable County Judge and County Commissioners and Management of Montgomery County.
In other words, 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 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 the 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.”
While the foregoing comments do not ascribe any sort of fault upon the County Auditor or upon the County, since 1987, Texas law has created a problem for counties such as Montgomery County with a population of 225,000 or more. The Local Government Code mandates that the County Auditor is also the chief budget officer of the Commissioners Court. Tex. Loc. Gov’t Code Ann. Section 111.032 (Vernon 2016).
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.
Montgomery County’s outside audits are deficient
Under the Government Auditing Standards, which are the Generally Accepted Accounting Principles, the outside audits of Montgomery County contain the following deficiencies (in order of Yellow Book section numbers) all of which relate to the lack of independence of the County Auditor and constitutes failures of the independence of the outside auditing firm as well:
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 of Montgomery County 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 or Weaver and Tidwell, 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.
With the enactment of HB 1930, regular citizens and public employees will have the opportunity to look at county financial statements with far greater assurance that those statements accurately and fairly portray the actual financial condition of each county. That’s an opportunity sorely lacking in Montgomery County where accounting gamesmanship and obfuscation prevail and where there simply is no outside independent audit of the County’s financial books and records.