Personal use of city-owned store membership cards raises red flags

The preliminary draft of Boulder City’s audit brought to light an issue with a former city policy that could have allowed employees to break the law.

The issue, involving city employees’ personal use of city memberships to club stores, came to light on Thursday, Nov. 30, when the accounting firm Piercy Bowler Taylor &Kern told the audit committee of a problem finalizing the audit report.

Richard Bowler of the firm said that a representation letter is usually signed by the city manager and financial director if they no longer work for the city when the audit is finished.

“If either of those leave and aren’t here when we do the audit, we still try to obtain (representation) from them as to the matters that we’re concerned about,” Bowler said. “This year, your chief financial officer left right about the end of the year. … In our attempt to obtain representation from him, he did not want to sign it.”

Former City Manager David Fraser resigned in June, and former Financial Director Hyun Kim left at the end of August.

Bowler said that the firm was concerned with this development, and their internal inquiries with the city did not identify anything.

Personal purchases

The day before the meeting Audit Manager Kyle Foutz of Piercy Bowler Taylor &Kern said that he spoke with Kim on the phone and the issue stemmed from the city’s Sam’s Club and Costco membership cards that were used for personal purchases by an employee. Both cards were provided to city employees to make purchases for the city.

“The problem was that a city employee used some of the rebate that had accumulated because when you have a (Costco) business account, you receive a 2 percent rebate on all purchases,” he said. “So the city employee went in and was making personal purchases. … They were using the card to make the purchase then using a personal credit card to pay it.”

The employee used $110 of the rebate.

According to Acting Financial Director Doug Honey, this was done in error and the employee attempted to make amends.

There have been no other problems like this reported, and city employees are no longer permitted to personally hold these membership cards, he noted.

“All cards are kept in finance,” Honey said. “They are checked out and logged in with corresponding purchase receipts upon return. The receipts are then reconciled to the monthly card statements.”

Acting City Manager Scott Hansen sent out a memo to all city employees Aug. 8 informing them of the changes with this policy.

Foutz said that when the mistake was discovered the employee purchased a $110 gift card to reimburse the city.

Practice raised concerns

During an exclusive interview with the Boulder City Review, Kim said he became aware of the city’s practice with its Costco membership cards during his tenure and the practice was concerning from a financial standpoint. He also said that he sent a memo about it to the former and acting city managers.

His reason for not signing the representation letter was because of how the language addressed that issue.

“It had a blanket statement that they wanted me to attest to, but I couldn’t,” he said during a phone interview from his new position in Washington.

He also said the he requested a revised letter from the auditors and said he plans to sign it when it arrives.

Bowler said that his real concern is not that this happened, because things happen, but rather it is that it did not come to light until Foutz talked to a former city employee about it even though current employees knew about the issue because of the August memo.

“What it does cause … is an opportunity for people buying things personally without sales tax on them, which is an illegal act, and you don’t want to be in a position where you’re facilitating illegal acts, especially on the part of the employees,” he said.

Bowler also said that this issue will “likely” be part of the management letter within the audit report.

Overall improvement

Despite this problem, the audit was much improved from previous years, according to the accounting firm, and showed just one material weakness and two other smaller deficiencies.

“In the past years we’ve had a couple more deficiencies than we have now,” said Councilman Rich Shuman. “It seems to be getting better and better every year that I’ve been on this audit preview committee.”

In December of 2015, an audit found that $50,000 was missing and unaccounted for in the city’s budget due to several utility deposits not being put in the city’s bank accounts.

Foutz said that last year’s audit had three material weakness in it, two of which were not an issue this year.

The material weakness was an ineffective month-end/year-end closing process that had previously been reported to the city by the firm.

This weakness forced adjustments to be made to clean up various balance sheet accounts for the year end, many of which should have been fixed before the audit.

“That item was on there last year, and we had made progress on it. … We have a checklist that we’ve used since I’ve been here,” Honey said. “The emphasis I guess this year has been that we need to have this checklist initialled by the individual that has done that particular process. That we have not done, and we will implement that immediately.”

Better procedures needed

Other issues included the need for better classifications for fixed assets and capital outlay, a proper period of expenditures, better recording of payroll increases, better recording of debt payments, better review work of deposits for golf course revenue, and safer location of blank check stock.

The firm also said that Honey needs more help in the financial department, and when the new financial director is hired, it should alleviate some of those problems.

Both Hansen and Shuman also praised him for his work for the city.

The audit will be presented to the City Council at its meeting Tuesday, Dec. 12.

Contact reporter Celia Shortt Goodyear at cgoodyear@bouldercityreview.com or at 702-586-9401. Follow her on Twitter @csgoodyear.