So, I was starting to get a complex. Since early last month, I’ve been fulminating about the horror that is the city’s accounting practices. The $33 million—or is it $27 million? Or $28.6 million?—in missing funds from the consolidated cash account, and the some $40 billion that, over many years and in many accounts, has gone unreconciled, in violation of the most basic fiduciary responsibilities.
I’ve called for the Finance Director and the Treasurer to step down because it’s an embarrassment that, right when the Mayor is seeking yet another tax increase, they are proving incapable of being faithful stewards of the money citizens have already given them.
Throughout May, Councilman Allan Domb kept cross-examining Finance Director Rob Dubow and Treasurer Rasheia Johnson, and their stories kept changing. (Most recently, in a May 25 letter to Council President Clarke, Johnson revealed that it’s 7, not 5, accounts that have gone unreconciled for years). Yet, few seemed that exercised about all this. In The Inquirer, there had been one story about the missing millions and then columnist Joe DiStefano opined that, actually, when it comes to cities, this kind of thing happens a lot.
It felt to me like that old Philly shrug. But all that changed this week, when Controller Rebecca Rhynhart released a bombshell of an Internal Control report that lays out in stark detail how Philadelphia trails virtually all other big cities in major accounting miscues. That’s right—when it comes to mishandling your money, we’re number one. Championship city, baby.
Rhynhart’s report and no-nonsense rhetoric seemed to wake people up, including The Inquirer, which ran a dead-on editorial headlined “City Hall, Stop The Dysfunction and Balance Your Checkbook. “
Yesterday, I caught up with Rhynhart to dive a little deeper into what the systemic issues are and what the fix or fixes ought to be. Here’s an edited and condensed version of our conversation.
LP: You laudably opened a can of worms this week. When I first started looking at this, Rob Dubow told me that they’d whittled the amount of missing money from the consolidated cash account down from $33 million to $27 million. But in your report, you’re still using the $33 million number. Why?
RR: $33 million is the amount that was confirmed by auditors from my office. Rob has publicly been saying $27 million, but that’s not confirmed. In fact, if you look at his June 5 response on page 38 of my report, he lists it as $28.6 million. So it went down and back up, according to them. This is why my office has opened a fraud investigation. There’s no evidence of fraud having occurred, but there needs to be a sense of urgency to get to the bottom of all this.
LP: I’ve been concerned about the missing millions, but also about the lack of reconciliation. But you’ve also found a staggering amount—$923 million—in other accounting errors.
RR: That’s right. We found two material weaknesses—the $33 million—and the $923 in material misstatements. We also found eight significant deficiencies that aren’t as bad as the material weaknesses, but that merit attention.
LP: And it’s material weaknesses that, if unaddressed, can adversely effect a city’s bond rating, right?
RR: Yes. We received a call from a money manager who holds Philadelphia bonds wanting to better understand the findings in the Internal Control Report.
That’s right—when it comes to mishandling your money, we’re number one. Championship city, baby.
LP: When you read Controller Butkovitz’s reports going back years, you see that much of this has been a longstanding problem. In fact, when you were Treasurer, he found in his audit of the city’s Fiscal Year 2010 Comprehensive Annual Financial Report a material weakness, and $1.1 billion in errors which was ultimately corrected.
RR: When I became Treasurer in July ’08, I remember an Internal Control Report finding about accounts that weren’t reconciled. I had two full-time civil service accountants working on reconciliation. There were times when we’d fall behind and I’d pay overtime to get caught up. By the time I left, in late 2010, all accounts were reconciled.
LP: And what you’re finding is that that sense of urgency to get caught up is lacking now, and has been lacking?
RR: That’s right. Rob’s response to The Inquirer was “catching mistakes is part of the process” but that shouldn’t be the way it works. Our auditors should find errors around the edges, but not $1 billion worth. Finance accountants shouldn’t be depending on auditors to prepare the books. I will say, I think there is now a sense of urgency on reconciliations. The plan that Finance and the Treasurer have come up with does have concrete steps and deadlines. But that can’t be said for the other material weakness—the $923 million in errors.
LP: And what kind of errors are those, by the way?
RR: Funds booked in one account when they should be in another, for example. Accounting errors that the controller’s office auditors shouldn’t have to find.
LP: In your suggestions for how to fix this, I have to say, they’re pretty much the same recommendations the controller’s office has long been making—more staffing, updated technology. I’m wondering if there’s something deeper at play here.
RR: We need a culture change. It has to feel like, from the Mayor on down, it is not okay to have substandard accounting practices.
LP: Here’s where we might disagree. I have less faith that this administration will self-reform, given how long these practices have gone on and given that the principal from the outside firm they’ve hired to audit the consolidated cash account had his accounting license suspended in a fraud case. To be fair, these problems predated this administration, although they’ve worsened during it. So I wonder, when you talk about culture change, if it’s really a longstanding City Hall culture that will only change with some form of outside, private sector oversight?
RR: I come from the private sector, but I don’t think this is all about just bringing in the private sector. We need to have a Mayor and a Finance Director that push change with real seriousness, the way other cities have done.
LP: Yesterday, Council passed Councilman Domb’s bill to require Finance to provide Council with monthly statements that detail the balances of city bank accounts. So that’s one way to get to accountability. But we also have a state oversight board, PICA, (Pennsylvania Intergovernmental Cooperation Authority), that was created to “foster the fiscal integrity” of the city. They meet next Tuesday—
RR: And I just spoke with PICA today and was asked to present at Tuesday’s meeting about the Internal Control Report.
LP: Well, you’re on top of that. Thanks for taking the time, and for the report that seems to have made a big difference.
RR: Thank you.