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State Auditor’s office says Fayette’s town procedures were faulty

Embezzlement possible due to lack of appropriate controls, insufficient oversight by town officials

 

By Robert Stevens 

 

01-30-2019

 

FAYETTE—After investigating the misuse of public funds in Fayette, the Utah State Auditor concluded the entire episode was avoidable.

The audit report found former town clerk Tracy Mellor misappropriated more than $300,000 over a period of at least nine years without detection due to a lack of appropriate internal controls and insufficient oversight by town officials.

The report even went as far to suggest that if things can’t get put in order, the town should consider disbanding as a government.

State Auditor John Dougall said, “Town officials failed in one of the most basic duties of elected officials, the separation of the duties of clerk and treasurer as required by law. Had they done so, it likely could have prevented or mitigated this theft. I applaud the conscientiousness of Mayor Leifson and the diligence of Sheriff Nielson and his team.”

The report, which was released on Tuesday, Jan. 22, details the audit review of an investigation into Fayette Town’s financial activity, internal controls and compliance with regulations from 2009-2018.

Subsequent to the investigation, Mellor pleaded guilty to three felony counts of misusing public money. On Wednesday, Nov. 21, the 6th District Court gave her a suspended prison sentence of 45 days in jail and ordered her to pay $153,390.89 in restitution, with interest.

The audit initially came to pass after newly-elected Fayette Town Mayor Brenda Leifson expressed concerns to the Sanpete County Sheriff’s Office (SCSO) about possible misappropriation of public funds by Mellor in May, 2018. Not long after that, the SCSO requested assistance from the state auditor with the investigation.

The report notes that it is the opinion of the auditor’s office that the misappropriation began well before 2009, but the audit scrutiny was limited to a nine year time span.

The document has six distinctive sections in which it details the findings of each area of the investigation. At the end of each section, the auditor’s office makes recommendations to Fayette Town government.

Fayette Town officials released a letter with official responses to the findings and recommendations from the auditor’s office.

 

 

  1. Former clerk misappropriated town funds

 

 

The first section of the reported is devoted to Mellor’s misuse of public money. Between Feb. 2009 – Feb. 2018 the auditor’s office confirmed misappropriation of $303,807.

“We believe that an additional $28,933 paid to the former clerk was also misappropriated,” the report states. “However, due to the passage of time and inadequate documentation, we have not able to conclude with certainty.”

The amount represents 12-13 percent of the town’s total revenues from fiscal years 2010-2018.

Contrary to previous reports, the audit found that Mellor’s method of channeling public money into her own pocket was a mostly three-pronged approach.

Although the bulk of the money ($229,764) was taken through checks made out to a family-owned business, $71,927 was stolen with checks made directly to her or her husband as the payee and $2,116 was simply taken in the form of blank checks or cash.

The report also details the various methods used to conceal the misappropriation. Mellor used the following methods of concealment during the decade-long pilfering process.

  • Falsifying the payee in the town’s accounting system and on check images included with bank statements to make the checks appear legitimate.
  • Withholding improper checks from town officials.
  • Manipulating bank reconciliation.
  • Forging signatures of mayors and councilmembers.

During the period reviewed, the state auditor’s office found 196 altered or manipulated check images in the records. During the same period, 175 Fayette Town checks (not payroll checks) were deposited into Mellor’s personal bank account.

The official recommendations of the Office of the State Auditor to Fayette Town include: seeking more restitution from the former clerk than was court-ordered, determining a method of dispersing the restitution among residents such as decreasing rates and implementing a method of preventing this kind of misuse again.

In Fayette Town’s official response to the recommendations they wrote, “we are investigating ways that will not break our contractual agreement with our water loans and grants that can return some funds to citizens.”

The letter also said the city would not pursue extra restitution from Mellor via civil litigations.

  1. Failure to separate duties

 

The second section of the report was devoted to the failure of the Fayette Town government to separate the duties of the town clerk and treasurer.

Utah code mandates that town officials do not allow the same person to operate as both a clerk and a treasurer.

Fayette Town officials appointed Mellor as both the clerk and treasurer and, therefore, the former clerk was responsible for receiving and depositing money, maintaining the financial records, retaining custody of cash and other assets, handling checks and reconciling bank statements in the accounting system. Many of these duties, when handled by one person, can create the opportunity to steal from a town with limited accountability.

The report claims that Mellor was handling duties that should have ideally been split between four different individuals to leave no room for misappropriation in government. In a very small town such as Fayette, with about 250 residents, practical separation of duties must sometimes be handled with additional help from members of the governing body.

“There is little evidence that town officials provided sufficient oversight or implemented controls to compensate for the former clerk’s conflicting duties,” the report states. “It appears the town officials were unaware of the law requiring separation of the clerk and treasurer duties. Furthermore, we believe the town officials did not understand the importance of separation of duties and did not implement additional procedures to review and reconcile the former clerk’s work. As a result, the misappropriation occurred and was not detected.”

The auditor’s office recommended that town officials comply with Utah state code, separate the aforementioned conflicting duties and make sure all members of the governing body receive proper training in these matters.

In response to section two of the audit, Fayette’s response was affirming that they had retained the services of Miller and Company CPA of Richfield to come help maintain a separation of conflicting duties.

“We also recognize that numerous ordinances were out of date or not properly passed,” the letter signed by the Fayette mayor and councilmembers states. “We are going to make an attempt to write or redraft past procedures for fiscal matters.”

 

  1. Town officials failed to provide adequate oversight

 

With theft repeatedly re-occurring across the span of an entire decade, “the misappropriation continued without detection because past and current town officials allowed the former clerk to perform conflicting duties.”

The auditor’s office also claims town officials should have easily caught this sooner because of several reasons.

One reason why the auditor’s office says town officials could have caught the misuse was the amount was 12-13 percent of the entire budget, which would have “likely impacted the town’s ability to operate and could have been noticed by town officials.”

The auditor’s office also claims the high frequency of thefts could have been detected by even limited and infrequent reviews of the monthly bank statements and reconciliations.

According to the report, the existence of so many inconsistent, manipulated and altered checks, and the length of time over which the theft occurred “indicates that multiple town officials failed to exercise proper oversight for an extended period of time.”

“The lack of oversight was caused by multiple officials’ failure to take an active interest in financial matters and understand certain laws applicable to the operation of the town,” wrote the auditor’s office.

A few of the recommendations from section three of the audit were that town officials need to take an active interest in the finances of the town and obtain better training through available state resources.

The office also recommended that officials who served before Jan. 1, 2018 should resign.

“There is only one town council member from the prior administration, whose term ends this year, and he assisted with the correction of the town’s malfeasance,” responded the Fayette leadership in the letter. “We believe he will be of value until the end of his term.”

The Fayette response adds, “The current town council is committed to getting the town’s fiscal matters under control.”

 

  1. Inadequate internal control

 

Internal controls are policies and procedures used to reduce risk in operations, reporting and compliance. According to the report, a lack of internal controls resulted in the non-detection of misappropriated town funds, inaccuracy of both external and internal reporting and the town’s noncompliance with a number of laws and regulations.

Due to the methods the former clerk used to misappropriate funds detailed in, the report states the office concluded that Mellor presented only legitimate checks to town officials for review and approval

The report claims that the Fayette leadership should require a complete list of disbursements and ensure that the numerical sequence of checks is complete.

As a detective measure, they should also ensure that someone other than the clerk reviews the original bank statements and bank reconciliation to verify that expenditures clearing the bank are appropriate.

In addition, an appropriate designee should also review supporting invoices or other supporting documentation before approving expenditures.

“Had town officials performed any of the procedures described above, it is likely the misappropriation would have been detected much earlier,” the report states.

Lack of independent review of bank statements, lack of required financial reports, absence of written fiscal policies and procedures and missing documentation all contributed to the issue as well, according the auditor’s office.

Recommendations from the auditor’s office to Fayette Town in section four were the prompt rectification of the very lack of internal controls and fiscal policies and procedures that allowed the misappropriation to occur so easily and for so long.

Fayette Town’s response was assurances that the recommendations were being followed, including: restricting signing of checks to two council members, transferring to a bank that allowed easier monitoring of accounts, mandating generation and review of financial reports moving forward and a promise to write a fiscal policy and procedure manual.

 

  1. Failure to post all required information to the Utah public notice website

 

Section five of the report was more brief its precursors, but detailed the fact that the city has not been following state code meant to insure transparency by posting all public information to the Utah Public Notice Website, which mandates that notice, agendas, and minutes of all public meetings be made available to the public online.

In addition, the report states some of the information that was posted was incomplete and other information items had been posted incorrectly.

“The website is administered by the Division of Archives and Records Service and its purpose is to bring greater accessibility to public notice information and increased participation by the public,” the report states. “Town officials did not ensure compliance with the law and did not pursue adequate training for those tasked with posting to the website.

The only recommendation from section five was compliance with the state code in regards to posting public information.

Fayette’s response to the recommendation began by explaining that Mellor had made a mess of the public information posting, and had complicated the process so much so that it had created the reoccurring issue of an inability to post the information easily.

The Fayette letter added that posting the information will be emphasized moving forward and a town employee is trained in the procedure

6. Likely noncompliance with the state procurement code

 

The final section of the report highlighted an incident when the town used a bidding process for the installation of security cameras for the town’s spring, which had been repeatedly vandalized.

Reportedly, a relative of Mellor is affiliated with the company that was awarded the contract. The report claims a review of bidding documents indicated that this company had the lowest bid. However, according to the current and former mayors, Mellor opened the bids alone without any witnesses present.

“Without at least one witness present at the time the bids were opened, we cannot verify that the bidding process was not manipulated to favor the former clerk’s relative,” states the report.

According to the auditor’s office, since Fayette does not have an approved procurement ordinance, it is subject to the State Procurement Code, which requires that bids be opened publicly, in the presence of at least one witness, and at the time and place indicated in the invitation for bids

“It appears town officials failed to ensure compliance with State Procurement Code, likely due to the Town’s lack of written policies and procedures,” the report says. “The Town should ensure transparency and fairness by establishing and complying with appropriate procurement practices.”

The auditor’s office recommends the town establish a procurement process ordinance, or comply with State Procurement Code.

Fayette’s response to the final recommendation of the report was assurances that they would comply with the state code until such time they passed their own ordinance.