Report Presented to Montgomery County Board of District Judges, December 2, 2016.
To: Honorable Board of Judges
Honorable Brett Ligon, District Attorney
From: Eric Yollick, Private Citizen
Re: Need for An Independent Audit Under Section 115.033 of the Texas Local Government Code
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There are three primary reasons that the Montgomery County Grand Jury should order an independent audit of Montgomery County’s government, pursuant to Section 115.033 of the Texas Local Government Code:
(1) the external and internal audits of Montgomery County finances lack independence, in contravention of Government Auditing Standards;
(2) the County’s budget process has lacked transparency and due care required under Section 111.038 of the Texas Local Government Code and under Article V, Section 18, of the Texas Constitution; and
(3) the County has suffered this hodgepodge with the result that nepotism, waste, and flagrant abuse have begun to overwhelm County spending.
1. The external and internal audits of Montgomery County finances lack independence, in contravention of Government Auditing 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/
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 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.”
The County’s Internal Audit Function: The County Auditor
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.
This Memorandum focuses on the outside audits of the last three years – Fiscal Years 2013, 2014, and 2015. The outside audits of the previous seven years, however, contain the same deficiencies.
The 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 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, 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:
A. 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.
B. 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.
C. 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.
D. 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.
E. 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.
2. The County’s budget process has lacked transparency and due care required under Section 111.038 of the Texas Local Government Code and under Article V, Section 18, of the Texas Constitution.
The Texas Constitution and statutes mandate the manner in which the County’s budget process must occur. Unfortunately, the County Judge and Commissioners do not fulfill their basic constitutional and statutory duties in the budget process, which occurs both during the budget period and thereafter in the numerous amendments which the Commissioners Court votes upon after they approved a budget.
The County Commissioners so chosen, with the County Judge as presiding officer, shall compose the County Commissioners Court, which shall exercise such powers and jurisdiction over all county business. Tex. Const. Art. V, Section 18. In Montgomery County, the County Auditor serves as the Chief Budget Officer. Tex. Loc. Gov’t Code Ann. Section 111.032 (Vernon 2016). The County Auditor must prepare a proposed budget for the Fiscal Year. Id. Section 111.033. The proposal is merely a working draft.
The real budget work of the County Commissioners Court begins, under the statute, when the Commissioners Court begins its public hearing on the proposed budget. The statute provides:
“The commissioners court shall hold a public hearing on the proposed budget. Any person may attend and may participate in the hearing.”
Tex. Loc. Gov’t Code Ann. Section 111.038(a) (Vernon 2016). During the administration of the Honorable Alan B. Sadler as County Judge, he permitted citizens to participate in the budget process and provide comments and suggestions during the public hearings, as Texas law requires.
County Judge Craig Doyal, however, has radically altered the process to restrict discussion and public input in the budget process. First, only some of the County departments appear during the public hearings at all. Some departments only make their budget requests in secret and lobby the County Commissioners outside of open meetings or outside of the so-called public hearing for their budgets. The “public hearing” is more of a pretense than anything else. The County Commissioners go through the motions of hearing a report from the Tax Assessor-Collector on expected revenue for the coming Fiscal Year. They hear comments from a small number of the County department directors. The hearings are far from thorough, because the real business is done behind the closed doors of the County Judge’s conference room and the locked doors of the County bureaucrats.
Second, during the hearings the week of July 25, 2016, for the Fiscal Year 2017, County Budget, the Commissioners Court prohibited citizens from participating in the hearing. During a break on July 27, 2016, County Judge Pro Tempore Mike Meador expressed his view that permitting citizens to participate in the statutorily mandated public hearing on the proposed budget would “set a bad precedent” and disallowed any citizen participation in the hearing. Similarly, County Attorney J.D. Lambright and Assistant County Attorney Amy Dunham assisted the County Commissioners in denying statutorily mandated public participation by issuing the following opinion when citizens attempted to participate in the public hearing:
“From: Dunham, Amy �
Sent: Tuesday, July 26, 2016 3:35 PM�
To: Werner, Patti�
Cc: Fredricks, James�
Subject: RE: Budget Hearing – Wednesday, July 26, 2016
The budget workshops do not include a public comment period. However, the designated times for public comment will be on August 9 and 23 (beginning at 9:30am), as well as September 6 (beginning at 9am).
Amy L. Dunham
Chief – Government Affairs
Office of JD Lambright
Montgomery County Attorney
501 North Thompson, Suite 300
Conroe, Texas 77301
Section 111.039 makes clear that only at the conclusion of the public hearing, during which any person may participate, may the Commissioners Court take a record vote on the budget. Instead, the Montgomery County Commissioners Court, under the pretense which the County Attorney provided, prohibited persons from participating in the public hearing and then proceeded to adopt the proposed budget on July 27, 2016, in a record vote. The County Commissioners Court and County Attorney prohibition – in direct violation of the Texas Local Government Code Section – constitutes Official Oppression under Texas Penal Code 39.03(a)(2).
Section 111.034 of the Texas Local Government Code mandates:
“The county auditor shall itemize the budget to allow as clear a comparison as practicable between expenditures included in the proposed budget and actual expenditures for the same or similar purposes that were made for the preceding fiscal year. The budget must show with reasonable accuracy each project for which an appropriation is established in the budget and the estimated amount of money carried in the budget for each project.”
This statutory requirement is one that the County Commissioners Court generally ignores in order to permit them as much flexibility during the progression of the year to spend as they please. A prime example of the failure to comply with Section 111.034 is the FY 2017 budget for County Department 6331, the Animal Shelter Department, which still has no operating plan, no specific line item budget, and no specific plan for spending at all, despite the allocation of $3.4 million to the program. No individual projects are within that department’s budget at all. The County Commissioners Court has exercised little discretion or oversight over any County Department. In comparison, the District Attorney Department, number 4351, a Department with which the County Commissioners have minimal operational dealings but over which they exercise considerable fiscal scrutiny, has a detailed budget down to the project level, in compliance with Section 111.034’s statutory requirements.
The County Judge and County Commissioners’ lack of scrutiny over the County Budget reflects poorly in at least two major respects. First, the County Judge and individual County Commissioners have little knowledge or understanding of the Budget, which they have passed but rather depend largely upon the knowledge and skills of the County Auditor, a county employee who is unelected and responsible only to the Board of District Judges who exercise no oversight despite their statutory duty to do so. Second, there are many deficiencies, errors, and omissions in the Budget which the Commissioners Court passes, because usually only one set of eyes, those of the County Auditor, has actually reviewed the proposed budget at all. These deficiencies, errors, and omissions come somewhat into the open when the Commissioners Court must begin to pass hundreds of pages of budget amendments – usually not discussed because those amendments are contained with the Commissioners’ Court’s “consent calendar” which they do not discuss – within a few days after the beginning of each Fiscal Year.
In short, the Commissioners Court has largely devolved its Constitutional duty to oversee the County’s finances and business operations to a county bureaucrat, the County Auditor. In doing so, the Court has drastically reduced the transparency of the budget process.
3. The County has suffered this hodgepodge with the result that nepotism, waste, and flagrant abuse have begun to overwhelm County spending.
The lack of due care in spending, finance, accounting, and auditing has resulted in much harm to the citizenry generally. The harm includes but goes far beyond violations of generally accepted accounting principles.
The rampant nepotism and political maneuvering involved in hiring and personnel decisions emanate from Section 2.2-6 of the County’s Human Resources Policy, which permits elected officials and department heads to select employees without any criteria.
The case of Mark Wysocki, Assistant Director of the Montgomery County Animal Shelter, since March, 2016, exemplifies the abuse, which occurs inside of County Departments. When County Commissioner Jim Clark, Precinct 4, hired Wysocki, a friend of a political supporter of Clark’s, Clark promised Wysocki a salary of $100,000 per year, more than double the national average salary for an assistant animal shelter director. The County’s Human Resources Department Director only approved a $60,000 per year salary for Fiscal Year 2016 for Mr. Wysocki. Therefore, in order to skirt the County’s Human Resources Policy and the established salary set for Mr. Wysocki, Commissioner Clark incorrectly classified Mr. Wysocki as a nonexempt employee (incorrect on the Federal Labor Standards Act, because, as a manager he should have been classified as a salaried employee ineligible for overtime compensation). Mr. Wysocki turned in highly dubious time sheets for the six-month period from March to September, 2016. His time sheets showed that he worked precisely even numbers of hours every day and worked from even times (such as 9 a.m. to 6 p.m.) every day as well. The time sheets contain a number of arithmetic errors. Mr. Wysocki claimed $16,000 of overtime, which would have put his annualized salary at the $100,000 per year, which Clark had promised to him in violation of County Human Resources policies. The County paid Mr. Wysocki the overtime. No one audited the time sheets. Both the department head, Todd Hayden, and Clark approved the overtime without questioning the bizarre time sheets, because the overtime claim was merely a pretext to skirt County employment policies.
An outside independent auditor conducting a full examination audit should and likely would have caught the violation of Human Resources policy.
Lack of Transparency: Public Information
Texas Attorney General Ken Paxton has said, “An open government is the cornerstone of a free society.”
Section 552.001 of the Texas Government Code, the Public Information Act, provides:
“(a) Under the fundamental philosophy of the American constitutional form of representative government that adheres to the principle that government is the servant and not the master of the people, it is the policy of this state that each person is entitled, unless otherwise expressly provided by law, at all times to complete information about the affairs of government and the official acts of public officials and employees. The people, in delegating authority, do not give their public servants the right to decide what is good for the people to know and what is not good for them to know. The people insist on remaining informed so that they may retain control over the instruments they have created. The provisions of this chapter shall be liberally construed to implement this policy.
(b) This chapter shall be liberally construed in favor of granting a request for information.”
The County government has turned the openness policy of the State of Texas on its head. First, it is very difficult for citizens even to determine to whom they should make a request for public information. Previous county attorneys (Frank Bass and David Walker) acted as a central clearinghouse for public information requests to the County. County Attorney J.D. Lambright, who took office on January 1, 2013, refuses to act in that function. Rather, he requires requestors to figure out on their own what department might have information they seek, to figure out on their own how to contact the head of that department, and to figure out on their own the manner of making the request. Lambright works behind-the-scenes with the county departments and their heads to block public information requests. After a citizen requestor makes a request, it is common for him or her to receive identically worded refusals of those requests from several county departments to whom they made the request. Those identically worded refusals all emanate from coordinated action of the County Attorney to deny access to public information, as many of the department directors have confirmed. Second, under County Attorney Lambright and County Judge Doyal, county employees are under firm direction not to provide answers to questions from citizens. Rather, they explicitly restrict granting public information to that information contained in written documents, if and only if the citizen-requestor can somehow correctly guess to whom to direct a request for public information. While that policy complies perfunctorily with the Public Information Act contained in Chapter 552 of the Texas Government Code, it has resulted in a blockade of information available to the public.
Likewise, the County has done nothing about the failure of Halff & Associates engineers to comply with the conflict of interest disclosure requirements of Section 176.006 of the Texas Local Government Code, which would clearly have required a disclosure posted on the County website concerning the business relationship between Halff’s Bobby Adams and his close friend and business associate County Judge Craig Doyal.
The growth of spending in the Montgomery County government has greatly exceeded the population growth of Montgomery County.
A survey of Commissioners Court meetings during the past two years (October 1, 2013, through the present) has revealed that the Commissioners Court has never voted against a spending proposal with the exception that the Commissioners Court recently trimmed $20,000 off of the budget for the Montgomery County Animal Shelter during the FY 2017 budget hearing. The County Judge and County Commissioners do not discuss spending matters in the Commissioners Court and have revealed an almost complete ignorance of the County Budget.
The adopted budget for FY 2017 is approximately $381 million. There is a one-line item of $29.4 million entitled “Internal Service Funds,” which is more than one-twelfth of the entire budget. Upon a query what Internal Service Funds were, neither the County Judge nor his Chief of Staff had any idea what this line item was. They had never asked, never investigated, and never noticed a line item near the top of the budget that was almost $30 million!
Conclusion and Recommendation
Pursuant to Section 115.033 of the Texas Local Government Code, the Grand Jury of Montgomery County should order a true audit of the books and records of Montgomery County in accordance with the Yellow Book and other Generally Accepted Accounting Principles.
The Committee on Finance should, in addition to the examination audit, conduct an analysis of spending growth in each department versus programs goals achieved to enable zero-based budgeting in the future.
The Committee on Finance should include in its report:
A. the results of a true examination audit;
B. the spending analysis;
C. proposed requirements for future internal audits;
D. proposed requirements for future external audits; and
E. proposed rules of transparency for the Montgomery County government.
The red line and y-axis on the left side shows the spending in millions of dollars, ending in a $381 million budget for FY 2017 (current year). The blue line and y-axis on the right side shows the population of Montgomery County, ending in approximately 547,000 wonderful people at the present time.
Clearly, the rate of County government spending growth has vastly exceeded the rate of population growth, particularly during the past sixteen years.