Bad bookkeeping blamed for $145K error [The Hawk Eye, Burlington, Iowa]

July 21--Years of bad bookkeeping practices have led to a $145,000 discrepancy in the cash balance of a jointly managed health insurance pool for Burlington and Des Moines County employees.

City and county leaders made decisions based on the false cash balance discovered late last year. In way of penance, the party responsible for keeping track of the accounts has offered to forego an entire year's worth of administrative fees and has pledged to overhaul its bookkeeping practices so such a mistake does not happen again.

That may not be enough for some skeptical members of the board that oversees the joint health insurance pool, and it remains to be seen how much the mistake will cost area government employees during future health insurance renewals.

"Maybe everything's entirely innocent here, and it probably is. But we're talking about public money," said Des Moines County Supervisor Tom Broeker. "I have concerns. And I don't exactly know how to address those concerns."

The pool

In the 1980s, several government entities within Burlington and Des Moines County pooled their employee bases to get better rates on health insurance from a shared provider, now Wellmark Blue Cross and Blue Shield.

The board that was created -- dubbed simply City of Burlington/County, or COBCO for short -- to manage the various employee health insurance plans included representatives from Des Moines County, Burlington, Burlington Waterworks, the Southeast Iowa Airport Authority, the Two Rivers Levee Association, the Des Moines County Regional Solid Waste Commission and the cities of Danville and Mediapolis.

Each group pays into the pool, creating a reserve fund used to offset claims made by employees and yearly changes in insurance costs.

For years, the accounting for the pool of funds was managed by two separate entities: COBCO and Employee Benefit Systems, a division of Two Rivers Insurance Co. Acting as a third-party administrator, EBS would handle the expense side of the books, while COBCO, via Burlington's finance director, would track revenue.

Two pieces of the same books, handled by two entities -- it was an accounting practice that eventually would prove to be ill-founded.

"The cash number that was being reported was not correct," said Mark Lehman, chief financial officer for EBS at Two Rivers insurance. "And it was not correct because the pieces were never melded together and tied out."

Bad bookkeeping

Lehman and certain members of the COBCO board are emphatic a series of recently discovered false cash balances in the health insurance pool were not the product of wrongdoing. What happened, according to Lehman, was the result of several years of bad bookkeeping.

EBS took over every aspect of COBCO's accounts, both the revenue and expenses, in December 2010. It was during the most recent health insurance renewal Lehman started to suspect something was off.

"What we found out internally in late 2012 in the financial statements being prepared and presented to the board is that the bank accounts weren't being reconciled to the bank statements," Lehman said.

An apt comparison is to the management of a personal checking account: Withdrawals and deposits are recorded in a checkbook and compared to a financial statement prepared by the bank. Before EBS took over as sole bookkeeper in 2012, the deposits were being handled by COBCO while EBS handled the withdrawals. Somehow, the two records never adequately linked up.

"That reconciliation was not done," Lehman said.

Suspecting a systemic problem, EBS went all the way back to its earliest records of COBCO's finances, August 2009. Sure enough, the lack of reconciliation between the two bookkeeping bodies extended that far back.

In response, EBS devoted hundreds of hours to reconciling the bank statements for each month since the summer of 2009 to come up with a correct balance.

"That was really the first time there was a full, complete set of accounting records," Lehman said.

What that balance turned out to be is unclear at this time, according to Lehman, as the official fiscal year's financial report has yet to be prepared.

What is clear, however, is 3 1/2 years of unreconciled accounts and unnoticed overdraft charges resulted in a $145,000 discrepancy in the cash balance for COBCO's health insurance pool.

"I wasn't very happy," Lehman said

Former City Manager Doug Worden doesn't entirely agree with Lehman's description of the discrepancy being the result of many years of unreconciled accounts. Worden handled the COBCO receipts as city finance director before he became city manager in 2008, at which time he passed the duty on to Dennis Bockenstedt. Worden said on his watch, reconciliations of the books occurred, though he couldn't speak for what happened under Bockenstedt. Bockenstedt, who no longer works for the city, could not be reached for comment.

"Whatever happened after 2008 I couldn't attest to," Worden said.

Even if some kind of reconciliation did occur, Lehman doesn't think it was adequate.

"I think internally there was some process going on, but it wasn't getting us to the correct number," Lehman said. "It wasn't a true and complete reconciliation."

Stephanie Stuecker, the city's director of administrative services, serves on the COBCO board. As an accountant, she doesn't think anything illegal happened.

"There wasn't anything missing," she said. "It was all there."

Lehman confirmed all the members who pay into COBCO's fund have made accurate and timely payments since 2009.

"There's no money missing," Lehman said.

A partial solution

Having diagnosed the problem and determined its severity, Lehman decided he had to take action.

"My reaction was we have to make it good," he said. "EBS has an obligation or a duty to bring it back in line."

To soften the blow, EBS decided to forego $96,000 in administrative fees, which amounts to an entire year's worth of service.

Lehman said he made the call to eat the bulk of the $145,000 discrepancy because the various employers in COBCO made financial decisions based on an incorrect cash balance when the most recent insurance was renewed.

"I believe if the true cash balance would have been known to the board, a different decision would have been made on rates," Lehman said.

COBCO renews its insurance package with Wellmark once a year, and each year, the rate the various employers have to pay fluctuates.

The rate partially is determined by the amount in COBCO's reserve fund, according to Stuecker. The employers and their respective employees aren't only paying in for health insurance benefits, they're paying into a reserve fund that's supposed to be at a certain target level in anticipation of fluctuating costs throughout the year.

If the cash balance in the reserve fund is less than the target, employees must pay more than they thought to make up the difference or reduce benefits when the insurance is renewed.

EBS discovered the $145,000 discrepancy shortly after the most recent insurance renewal.

"That's cause for a lot of concern," said City Manager Jim Ferneau, who represents the city on the COBCO board.

EBS's decision to forego $96,000 in fees still leaves a difference of $49,000, a number that goes a long way toward comforting some of the members on the COBCO board.

"Because EBS has come forward and made it right or made us whole almost, it really won't have any effect," said Becky Perry, who represents the Des Moines County Regional Solid Waste commission on the COBCO board.

"It's not anywhere near as significant as the $145,000 they were talking about," Ferneau said.

Still, without the entirety of the discrepancy being erased, the mistake likely will influence negotiations over future rates.

"You're talking about almost $50,000," Ferneau said. "It's going to have an impact."

What that impact will be remains to be seen, though the biggest blow may be to city and county employees.

Future safeguards

Having come on the scene only within the last four years, Lehman is unsure why COBCO and EBS didn't reconcile its books for all those years, though he's determined to make sure a similar incident won't happen again.

Looking to add a layer of oversight, COBCO plans to create a review committee that will receive monthly financial reports from EBS. The board hopes to use the expertise of Stuecker and two other accountants to assure accounts jibe from month to month.

But this isn't enough for some of the COBCO board members.

Des Moines County's representative and local business owner Jerry Sherwood thinks the COBCO board should have the books regularly audited by an independent company.

Stuecker doesn't think that's necessary.

"What are you looking for? What do you want to find?" she asked. "To go back through every transaction like Mark (Lehman) did, that's what's called a forensic audit, and those are very expensive, especially for multiple years."

Lehman estimated it could cost $90 an hour to conduct an independent forensic audit, and someone would have to pay that sum.

"Someone's going to have to pick up the cost to have an outside auditor come in," Ferneau agreed. "And I don't think they're going to find anything's been done incorrectly from an auditing perspective. I think what they'll find is what's been found: They weren't doing a true balance."

But Broeker and Sherwood remain concerned about the possible mishandling of public funds, and for them, an audit of some kind may provide the only comfort.

"When there's this much money changing hands, I think there needs to be an outside set of eyes." Sherwood said. "Looking at it and making sure."

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