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May 6, 2009 12:32 PMPublication: The Southampton Press

Town grows impatient with auditing firm

May 6, 2009 12:32 PM

With more capital budget discrepancies coming to light, Southampton Town Supervisor Linda Kabot has asked the town’s auditing firm to recalculate the town’s annual general fund balances from 2005 to 2007—and may take legal action to get them to do so.

According to Ms. Kabot, Albrecht, Viggiano and Zureck, the town’s external auditing firm, has not yet responded to her request, submitted in writing a month ago, to restate the fund balances at the conclusion of each year of the three-year period, and to provide an opinion on the situation.

AVZ has been the town’s external auditors since 2004 at a cost of $250,000 per year.

The need to restate the fund balances, Ms. Kabot said, stems from failures by the office of the town’s former comptroller, Charlene Kagel, to move money from the general fund to the capital fund in 2004, 2005 and 2006—cash that the Town Board authorized to be transferred but in fact never was.

Because Ms. Kagel did not inform Ms. Kabot of the incomplete transfers until last March, after AVZ closed out the 2007 books, the fund balances were overstated, producing a ripple effect in subsequent town budgets. The year-end fund balance for 2007 was overstated by millions.

In its 2007 Comprehensive Annual Financial Report, AVZ reported the town’s general fund balance to be $16.6 million. Relying on AVZ’s figures, the town added close to $8 million of spending—about half of what was believed to be a budget surplus—in the budget for 2009.

But, in fact, when the direct appropriation errors are added into the mix, the accurate fund balance is closer to $8 million—which means that the town could close out 2009 with an overall deficit. Just how close the town is to that point is unclear, since a full reconciliation of the town’s books is not yet complete, but the town could be in violation of a local law mandating a tax stabilization fund reserve in an amount equal to 10 percent of the general operating budget.

In Ms. Kabot’s view, the auditing firm should have picked up the direct appropriation errors and omissions for 2004, 2005 and 2006, which are estimated to total $8.5 million. “They did not pick up three years worth of these errors,” Ms. Kabot said Monday. “They have some culpability.”

Officials of AVZ did not return several inquiries seeking comment.

While the town is considering its legal options, Ms. Kabot said the town will be bringing in a second auditing firm to offer a second opinion. Two of the firms being considered for that peer review are FTI Consulting, which is currently conducting a forensic audit on the police fund deficit, and Nawrocki Smith, LLP. Ms. Kabot said the town may retain one of the firms to replace AVZ once the second opinion is rendered.

As Ms. Kabot explained, she—as the town’s chief financial officer—and the current Town Board relied upon AVZ’s audited 2007 fund balances for 2008 operating budget appropriations, and the continuance of the spending plan for 2008. Ms. Kabot further relied upon those audited fund balances, she said, to project fund balances for year-end 2008, in order to form a tentative budget for 2009.

“The Town Board relied on my 2009 tentative budget, converted it to a preliminary budget, for which we collectively made further budgetary amendments,” Ms. Kabot explained in a letter dated March 24, which she sent to Jeff Davoli, an AVZ partner. In that letter Ms. Kabot requests the firm restate the earlier fund balances. According to Ms. Kabot, AVZ has not yet responded.

Ms. Kabot further explained that approximately $4.5 million was appropriated from various operating reserves to achieve the adopted 2009 tax rate—which is fixed and cannot be adjusted. Of that $4.5 million, $2.5 million came from general fund balance.

The town’s general fund balance is further constrained due to money from that balance being utilized to offset deficits in the other town funds, such as Police, Highway and Waste Management.

Back in February, former town councilman Dennis Suskind urged the town to hire a new auditing firm, and Town Board members Chris Nuzzi and Anna Throne-Holst responded favorably to Mr. Suskind’s suggestion.

Ms. Throne-Holst said Monday that bringing in another firm to take a second look at the town’s books was priority and said she wanted to hire a new firm to audit the town going forward. “I didn’t want to retain AVZ in the first place,” Ms. Throne-Holst said. “Had we brought on somebody new, we might not be in the fix we’re in now. Changing auditors is sound fiscal policy.”

Ms. Kabot agreed: “Auditors should be freshened up every few years.”

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