Audit of Los Osos Community Services District reveals accounting issues

An independent audit of the Los Osos Community Services District for last year, released earlier this month, found that accounting couldn’t be easily tracked, vacation and sick pay were inaccurately reported, and at least two employees received overtime pay for work done during normal business hours.

Two members of the district’s board of directors said they don’t believe the district’s administration has committed any unlawful activity. But directors Chuck Cesena and Jon-Erik Storm said this week that the district’s in-house procedures broke down and led to accounting inaccuracies and confusion. 

“I don’t think there’s malfeasance,” Cesena said. “I think there’s just sloppiness. I don’t know why the journal entries were so confusing. Money is moving here and there. You want the finances to be as transparent as possible.”

The auditing firm Moss, Levy and Hartzheim laid much of the blame for the accounting problems on turnover, as well as poor district oversight. 

Though district General Manager Kathy Kivley isn’t directly blamed, the audit found that entries made by her in the district’s books led to difficulties following and tracking the accounting. 

Kivley was hired in 2013 after reportedly being fired the year before as city manager in Atwater. She also previously worked for the cities of Clearlake and Delano and Madera County. 

In one of the auditor’s findings for the fiscal year ending June 30, 2014, Moss, Levy and Harztheim noted the difficulties in tracing entries of account balances moved from one account to another in the district’s general ledger. 

The audit stated that Kivley shouldn’t have made entries in the ledger. Rather, those duties should be handled solely by the district accountant, with Kivley’s signature approving the entries. 

The idea behind the accountant solely handling those entries, with oversight from the general manager, is that it creates a segregation of duties designed to prevent misstatements or to conceal any misappropriation of assets, the auditors wrote.

“We noticed that it was difficult to follow and trace the accounting from one account to another due to the large amount of journal entries made, many of which were canceling a previous entry,” the audit stated. 

The assessment revealed that “many adjusting journal entries were made directly into QuickBooks by (Kivley).” 

The audit didn’t state who specifically made the original entries.

Another finding showed the reported balances of vacations and sick time were the same as the year before, raising an alarm of probable inaccuracy, which the auditors verified. They noted that staff turnover caused a lack of knowledge about how to use the payroll system. 

The auditor recommended creating a manual for management and staff to refer to so that turnover would not threaten analysis of historical data.

The audit also found that two of 25 employees tested during an auditor’s payroll assessment received overtime pay for work done during normal business hours, indicating a misappropriation of assets. 

The district has 12 administrative employees (11 full-time and one part-time) and 23 reserve firefighters making up its staff.

The audit identified lack of “district oversight” for those mistakes and noted that all timecards should be reviewed and approved by the appropriate supervisor to ensure correct codes are reported. The district has taken corrective action, the audit noted. 

Kivley responded that she and the district accountant were the only ones with any financial government accounting experience. 

They were tasked with rectifying numerous accounting discrepancies from previous years, including years when the district was in bankruptcy after halting plans to build a sewage treatment plant (the project was ultimately taken over by San Luis Obispo County).

“As a result of the workload required, the accountant requested that the GM input the journal entries into the financial accounting software,” Kivley said in an email to The Tribune. “The accountant reviewed all the journal entries prior to being posted to the (ledger) and oversaw the posting of the entries.” 

Kivley said that difficulties in following how entries were made in the ledger were due to mistakes made in previous entries by past employees that had to be reversed or reclassified, as well as the learning curve of a new accountant.

Kivley said the district doesn’t use QuickBooks, but rather a “much more sophisticated financial accounting software called Sage Abra MIP.”

Expenditure write-offs and payments relative to finalizing the bankruptcy also complicated the accounting and needed correcting, Kivley said. 

Kivley added that corrections have been made by the district to use a new payroll tracking system, and “establishing a clear line of payroll responsibilities” to make sure overtime pay isn’t misappropriated. 

And Kivley said the staff has learned how to accurately account for vacation and sick time with its software to ensure proper accounting.

Cesena recommended holding more frequent advisory committee meetings to review accounts and check accuracy. 

The district has committees — made up of members of the public and board directors — in emergency services, finance and utility services. They currently meet quarterly. 

“Budget items tend to get into the minutiae, and with more meetings we could review these numbers a lot more closely,” Cesena said. 

Storm said that “it is not acceptable to get this kind of result from an audit.” 

“I will remain concerned until subsequent audits confirm we’re back on track,” Storm said. “More committee meetings might have caught some of the problems with the audit, but it would be a mere bandage for deeper issues — and those are what we need to examine and prevent from reoccurring.”

Board president Mike Wright defended the district’s staff, saying corrections have been made to ensure future accuracy and that Kivley and the staff were asked by the board to review several years of district finances, which complicated matters. 

“When we knew we were coming out of bankruptcy, we wanted to review all the accounting over several years and make sure things were properly funded and noted,” Wright said. “There was turnover during this period, and we had a new district accountant come on. … But now, everything’s on the up and up. I expect our audit next year to be very clean.”