WPCA receives scathing audit [The Stamford Advocate, Conn.]

Jan. 08--STAMFORD -- Outside auditors unearthed numerous problems during a year-end review of the Water Pollution Control Authority's finances, including several issues identified in the previous year's audit that were never corrected.

Bruce Blasnik, a partner with the Stamford auditing firm O'Connor Davies Munns & Dobbins, said a lack of management at the sewage treatment plant rises to the level of material weakness, the most serious level of risk in financial reporting practices. Blasnik discussed the WPCA's financial woes during several meetings with the board of directors following the completion of the fiscal year 2010-11 audit.

"Material weakness -- we don't take that term lightly," Blasnik said. "And it wasn't just one error or one problem that we noted. It was a number of errors that accumulated throughout the audit process and generally caused us to conclude that there's a lack of oversight and lack of accountability in the organization."

Auditors also identified several significant deficiencies, the next highest level of financial risk. Blasnik said the WPCA lacks adequate internal controls for billing and collections, accounts receivables and sewer connection charges.

"There's nobody here who really understands the entire billing process," he told the board of directors.

The WPCA's ambiguous relationship with the city may contribute to financial confusion at the sewage treatment plant, the auditors said. For a second time, they recommended the Government Center and sewage treatment plant work out a formal service agreement to define financial and logistical responsibilities.

Director of Administration Fred Flynn agreed with the majority of the auditors' recommendations.

"I think management has to do a much better job on managing the cost structure," he said. "We seriously need a strong finance person and that has become increasingly obvious."

Several of the auditors' comments are repeat problems identified in their 2009-10 review, although last year's report did not find any material weaknesses. Flynn said resource constraints and "competing priorities" are part of the reason these concerns weren't addressed over the last year.

A bright spot to an otherwise dismal report was financial transparency. Blasnik said the WPCA's leadership seems willing and eager to address its fiscal problems.

"I commend you for that,' Blasnik said. "Nobody is trying to sugar coat anything."

MATERIAL WEAKNESS

The WPCA's board of directors agreed with the auditors' assessment that a financial professional is sorely needed on Harbor View Avenue. Blasnik pointed out that the city's golf course has an accountant but the sewage treatment plant, which operates on a $22 million annual budget, does not.

"There are a number of things that we noticed when we went in to look at the financial statements," Blasnik said. "There were obvious errors in account balances that kind of jumped off the page at us."

The auditors found expenses charged to projects that had already been closed out, a lack of sound monthly financial reporting and inadequate follow-up procedures for liens on delinquent accounts. The WPCA's accounts receivable bookkeeping wasn't reconciled to the general ledger.

"That was out by over $1 million," Blasnik said. "And you didn't need to do much to see it."

Many errors amount to basic accounting mistakes, Blasnik said. The auditors found the WPCA does not have anyone who understands the plant's entire billing process and overall finances.

"It is an issue," Blasnik said. "You shouldn't have to rely on your audit firm to come in and make these types of observations."

The auditors recommended the city hire an accountant or controller to manage the WPCA's books. The board of directors agreed a full-time finance manager should be hired as soon as possible and unanimously voted on Dec. 16 to authorize the board's human resources committee to initiate recruitment of an operational controller.

Board of Finance Independent Kathleen Murphy said she helped write the job description for the new position and is disappointed the board hasn't advertised for applicants yet.

"They are delaying," she said. "They have not even posted this job. They do not respect this position, they do not even understand what an operational controller can do."

WPCA Vice Chairwoman Mary Lou Rinaldi said the new position hasn't been posted because the board still needs to come to a consensus on what the job's roles and responsibilities will be. Rinaldi said she would like to hire a financial controller who is equipped to deal with project bonding, settling billing appeals and meeting regulatory requirements.

"I really think that a financial person has to be prepared to do those things," she said. "If we hire the right person, then they will more than pay for themselves."

BILLING CONFUSION

WPCA officials knew about problems with billing and collections long before they received the auditors' management letter. Last summer, more than 40 customers claimed they did not receive April 15 sewage bills and were surprised when they were given a notice of intent to lien for delinquent payment. Annoyed WPCA customers periodically appear before the board of directors to complain about billing errors or dispute charges, and the volunteer board regularly dedicates a portion of its monthly meetings to sorting out customer appeals.

The year-end audit confirmed significant problems in the WPCA's billing and collections process, even though the plant outsourced the responsibility to the Milford-based company Computil a year ago. Receivables have ballooned over the past year, Blasnik said, meaning a significant amount of potential revenue is not being collected.

"There are liens that are placed on delinquent accounts," Blasnik said. "That process is taking place, but there aren't any controls. There isn't any follow up."

WPCA customers currently owe more than $3 million in outstanding bills that are over 120 days late. Twenty-one clients alone owe about $700,000, but the delinquent accounts lingered for months before being turned over to the WPCA's lawyers for legal action. Flynn called the blip in collections "embarrassing."

"It shouldn't have happened," he said. "I think a lot of people contributed to the laxity of what happened here. Computil would tell you that they inherited a much bigger mess in the transition than was foreseen. They had to apply more resources than they originally anticipated. In retrospect, I think that's true."

Blasnik, whose company has served as Stamford's auditor for the last two fiscal years, agreed the problem is longstanding.

"A lot of these issues have existed for a long time," he said. "It was this way when we went in last year and I suspect it was this way in the years prior to our involvement."

UNCLEAR RESPONSIBILITY

A perennial point of contention at the WPCA involves the unclear relationship between the sewage treatment plant and city government. Different opinions have been presented over the years as to whether the plant is legally attached to the city or a completely separate entity.

The confusion often results in repair slowdowns after events that affect both the WPCA and the city. A sewage line collapse under Shippan Avenue, for example, left a sinkhole in the road for weeks as WPCA officials clashed with city highway workers over whose responsibility it was to clean and pay for the mess. Hiring process approvals are also affected because it's unclear if newly created positions, like the financial controller, need to be approved by the city's Personnel Commission, Rinaldi said.

The fuzzy boundary between the Government Center and WPCA leads to financial confusion, the auditors found. Salaries for WPCA employees are budgeted separately from the city, but positions are posted and recruited through the human resources department at the Government Center. The WPCA relies on the city to do its accounting, but it's unclear who in the finance department is tasked with the responsibility. The WPCA pays into Stamford's risk management fund, but former Director of Legal Affairs Michael Larobina told the auditors his department isn't responsible when the plant is sued.

"I think there needs to be some clarification," Blasnik said. "It's not clear who is responsible for what. And there are a number of things that are sort of falling through the cracks. There's nobody that's in a position to just sit back and look at the numbers on a regular monthly basis. As a result, a number of errors happen throughout the year."

The definition of the city's relationship with the WPCA depends on which corporation counsel you talk to, Rinaldi said. Under former legal affairs director Tom Cassone, the WPCA was connected to the city. But a legal opinion procured by Larobina ruled the sewage treatment plant is an authority, completely separate from the Government Center.

"Is the WPCA a part of the city or not?" Rinaldi said.

While the legal separation is up for debate, Blasnik said the city and WPCA's finances are clearly linked.

"The city in essence acts as the WPCA's bank," he said. "The cash balances have been essentially negative over the last two years. There's been a strain on cash flow."

Flynn said there are plans to develop a thorough outline detailing the financial relationship between the Government Center and WPCA.

"It will clearly define the services provided by the city," Flynn said. "It could be accounts payable, it could be payroll, it could be general accounting, it could be purchasing. There will be a form of grid-note that will govern the basis on which advances are made to the WPCA. It will improve the quality of documentation that currently exists."

MOVING FORWARD

Getting the WPCA's financial house in order "should" influence user fees, which increased by 8.4 percent this year, Flynn said. But falling consumption coupled with rising maintenance, compliance, wage and benefits costs were the real drivers behind the rate hike, he said. WPCA customers now pay $3.86 for every hundred cubic feet of water they use, which represents a 30-cent increase from the 2010 rate.

Securing strong financial and executive management at the WPCA is paramount to fixing its financial problems, Flynn said. The treatment plant does not have an accountant and has been without an executive director since its longtime leader Jeannette Brown retired in June. Brown, who is now president of the Water Environment Federation based in Virginia, was not strong financially, Flynn and the auditors said.

"Jeanette was there through virtually all of fiscal year 2011," Flynn said. "So it wasn't like there wasn't anyone managing the store."

Former Board of Directors Chairman Lou Casale, who resigned December 30, also said Brown was responsible for the plant's finances until her departure.

"Don't try to blame us for something we didn't have anything to do with over the past year," Casale said. "The board wasn't really hooked up to the day-to-day spending. Jeanette was in charge. She was the executive director and that was her job."

Brown said she doesn't believe the WPCA's financial problems are her fault. For the majority of her nearly four-decade tenure at the sewage treatment plant, financial tasks like debt service and billing were the Government Center's responsibility.

"When the new administration came in they said we were a separate organization and we were supposed to be doing all these things independently," Brown said. "We had no staff or any way of doing these kinds of things. It's easy to blame me because I'm not there, but I think the problems were basically due to this concept of making the WPCA separate and the confusion that caused on many levels."

Rinaldi has defended Brown since her departure.

"The executive director has been gone for six months and we can't be living by things she said or did," Rinaldi said at the December board of directors meeting. "You can't blame her forever. She's not here."

Murphy said the year-end audit demonstrates the need for a complete leadership overhaul. Replacing the former executive director won't completely solve the problem, she said.

"In the corporate world there would be a shake-up on that board," Murphy said. "This is not an issue just because Jeanette's not there. Jeanette was part of the problem, in my estimation. But the board's not really asking the tough questions."

Staff Writer Kate King can be reached at [email protected] or at 203-964-2263.

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