Review: Fraud risk high at City Hall

Two workers on paid leave after report flags financial, accounting operations

Santa Fe’s city manager placed two government employees on paid administrative leave Thursday after a blistering report on municipal operations found “extremely high risks of fraud” with inadequate internal controls.

City Manager Brian Snyder would not identify the workers but said they could face disciplinary action, including termination or demotion, pending further investigation.

Not yet clear is whether or to what extent fraud might have occurred. That wasn’t addressed by the investigation, done over several months this year by Albuquerque-based McHard Accounting Consulting.

Rather, the company’s report identified 62 issues across several divisions of city government that show Santa Fe “is at a higher risk of fraud than is acceptable,” city spokesman Matt Ross said.

In a statement, Mayor Javier Gonzales said, “I’m glad that we’ve built a culture that isn’t afraid to take a hard look at where we have serious internal problems — but it should go without saying that the situations these findings are based on are unacceptable and have to change.”

Ross said the city will continue to evaluate the findings and follow the facts where they lead. A complete forensic audit would require City Council approval, he said.

He added that many of the issues identified in the report will be “alleviated” by a city reorganization and overhaul initiatives already underway but that “many challenges remain.”

City Finance Director Adam Johnson said another private firm, Albuquerquebased Anderson Consulting, will assist him as a stopgap to maintain continuity in city financial operations as the recommendations listed in the report are implemented.

That contract, like the McHard firm’s, will cost the city up to $50,000, Snyder said.

The report centers mostly on financial and accounting operations, where there is an “almost complete lack of internal controls.”

Among other concerns, the report says the city uses an outdated accounting system; lacks appropriate processes for handling cash; lacked an active “audit trail” on accounting software; maintains a “needlessly complex” chart of accounts where fraud could be hidden without detection; and uses “absurd and archaic” practices like hand-entered credit card payments that are both inefficient and

vulnerable to loss or tampering.

In addition, some employees have had “no training for their jobs,” the report says.

Certain city positions are highlighted in the report, the most prominent being the assistant finance director, who as recently as this week was identified as Teresita Garcia on the city website. The report calls this role the most notable of employees who have “complete and unfettered access” to every city system.

Other positions mentioned with some specificity elsewhere in the report are the procurement division director, or purchasing director, listed online this week as Robert Rodarte, and the city’s internal auditor, listed as Liza Kerr.

Referencing the assistant finance director, the report states: “There are no internal controls to limit their access to funds, nor any ‘safety net’ to catch a mistake, whether honest or intentional.” The report adds the assistant finance director has “the ability to change any transaction without any supervisory approval” and “can create a contract, enter a vendor, enter invoices and generate payment in any amount to any vendor.”

“In short,” the report reads, the assistant finance director “has the ‘keys to the kingdom.’ ”

Garcia could not be reached for comment. The report also states that the procurement division’s procedures “likely lead to higher costs and put the city at greater risk for fraud schemes.” There has been no training on purchasing practices within the city for a decade, the report says, adding the division director described many employees as “untrainable.” Rodarte also could not be reached Thursday.

The internal audit department, which consists of one employee, Kerr, “does not appear to have been particularly effective,” the report states, adding Kerr’s reports have “failed to address most of the issues noted in this report.”

Kerr disputed that claim Thursday. “Every audit I have mentions there’s no policies and procedures throughout the city — it’s one of my repeat findings in every audit I’ve ever had. It comes up over and over.”

The problem areas came about, Finance Director Johnson said, not from “a single point of failure” but rather because the city has the “illusion of [internal] controls.”

Johnson initiated the request for the external report, he said, after he identified “significant red flags” a few months after taking the job of finance director. He took his concerns to Snyder, who then authorized the review, which began in March.

The report states many of its findings “should have been identified either by the external auditor, the internal auditor or both.” Snyder said that also was his reaction after reading the report.

“I’m reliant on the professionals around me to call it to my attention when they see anomalies or deficiencies,” he said.

“I can’t pinpoint one area, and I’m not putting any blame on any one individual,” Snyder added. “I’m putting the blame on the functions that we had in place. [They] were not what they were believed to be. They were not what I knew them or what I understood them to be.”

Snyder said some of the report’s recommendations were in the process of being addressed before the document’s release.

He also said the city’s ongoing transition to an enterprise planning system will provide an “underlying resolution to many” of the concerns raised in the report.

“It’s not a park. It’s not a road. It’s not something people get to enjoy or use, but it is the guts of how the city operates,” Johnson said. “And it must be fixed.”

The new system is to be implemented by January 2019, Snyder said, with financial modules ready for the fiscal year beginning July 2018.

Councilor Joseph Maestas, who is running for mayor, announced he will again propose a resolution that would put a charter amendment on the ballot to authorize an independent inspector general for the city.

Within a week, Snyder said, city officials from the relevant divisions would issue a response to each of the 62 issues identified in the report.