Corrective Action Plan: Covington Outlines Response to Auditor's Report
"I'm very sorry this sad event took place in the first place."
Covington City Manager Larry Klein addressed the public and the city commission Tuesday night, mapping out the city's response to State Auditor Adam Edelen's examination of the finance department following the alleged embezzlement of $793,000 by former director Bob Due.
"This is not the city commission's fault," Klein said. "There is no way they could have known about it."
Klein referenced how Due allegedly entered City Hall after hours and wrote checks to himself and deleting the evidence from the records sixty-eight times over a dozen year period. "(Due) covered it up in a way that was tough to detect," the city manager said.
Klein's presentation not only follows the auditor's report but also rumblings that the theft could cost him his job. City Commissioner Steve Frank is the only member of the commission to state publicly that he is unsure where he will fall on that decision. Commissioner Michelle Williams said Tuesday that she will take more time before commenting on the matter.
The auditor's examination revealed a scathing lack of oversight in the finance department allowing Due to execute his plan for more than a decade. "I am sorry that procedures were not in place that could have possibly stopped this," Klein said.
"I take this very personally. There is probably nothing more personal that could happen to a person in this position," Klein said. "If I could turn back the clock, I would. I have had a lot of sleepless nights over this event."
"I love this city. I love working here."
Klein said that with his community investment plan adopted last summer, an outline to a sustainable path for consistent attention to infrastructure and quality of life issues among other things, the city is on the right course. "I think everyone agrees we're on the right course and headed in a great direction and I assure you I will do everything in my power to fix these problems and get every penny of our money back," he said.
The auditor's office requires a corrective action plan to be submitted within sixty days after Edelen's report.
Klein and new Finance Director Lisa Goetz presented the early phases of that plan on Tuesday, addressing all twelve findings in Edelen's report.
Finding one: Due wrote 68 checks to himself, his wife, his aunt, and to a vendor under his control. The auditor recommends recouping the funds and strengthening the internal controls.
Finding two: Lax controls in the finance department. The auditor recommends improvements as soon as possible, including better training of staff and segregation of duties.
City response: "I am currently working with staff on an updated accounting manual," Goetz said. Management has begun a segregation of duties and there is new limited access to special functions of the accounting process, Goetz and Klein said.
"Why weren't you doing that before?," Williams asked.
Klein said a lax system was in place throughout Due's alleged crimes. He previously said that he trusted Due too much.
Meanwhile, within twenty-four hours of the realization that Due had possibly stolen from the city, he was arrested, the action plan stated. Lawsuits to recoup funds were filed within ten days and minutes after the arrest, a news conference was called.
Passwords are now changed every ninety days (the auditor's report indicated that the password was often "password"), the city manager and finance director now review al requisition reports and check registers, check writing is limited to a primary and back-up check writer which excludes the finance director, all printed checks are reviewed and initialed, and all current and past vendor accounts are reviewed for irregularities.
An internal auditor position was created in June, before the alleged theft was discovered, and filled in December. A new finance director was hired and an assistant finance director started this week.
Finding three: Due also served as the department's IT administrator
City response: The city created and is seeking to fill a separate IT administrator that will report directly to the city manager and not the finance director. New accounting software is also being selected and evaluated.
Other findings: Weaknesses in the purchasing and payables process, revenue and collections procedures need improvement, internal controls over bank accounts need better controls, and the city should improve internal controls and oversight for pension funds.
"There is no evidence that the old pension fund was misappropriated," Klein said.
"This is a lot here," Commissioner Williams said. "Twelve findings here, there's a lot going on that's wrong. Did the auditor find that finance was doing anything right?"
"One right thing they did," Klein said, "was find the problem and stop the theft."
"Thirteen years," Williams said. "Tell me something else. That was an accident."
Klein said that it was a vendor check that was missing a piece of relevant information that triggered questions by a member of Due's staff.
"There's a half billion dollars in funds administered through Covington," Commissioner Chuck Eilerman said. "A lot of these recommendations have to do with best practices going forward. They don't reflect something wrong in all these areas. I think that all of the Kentucky cities and cities of our type are taking on these improvements to be more effectively managed. (The alleged theft) reflects only on what Bob Due did and we're correcting that."
Other findings: Credit card policy needs to better track where the cards are, payroll duties were not adequately segregated, accounting procedures are unclear, and the city should improve oversight of processes outsourced to third part organizations.
Many of the city's corrective action steps were discussed at a meeting of the Task Force to Restore Public Confidence meeting on Monday.
"I am disturbed," Commissioner Steve Frank said, "that external auditors all thirteen years would not have tested enough of the controls because quite obviously, the system was busted."