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Pahrump Mirror
Pahrump, Nevada
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September 25, 1997     Pahrump Mirror
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September 25, 1997
 

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Pahrump Valley Gazette, Thursday, September 25, 1997 II Only in Nye: When an audit is not an audit Sometimes the truth is so outrageous that it cannot be told. The danger is that at times the truth can be so unbelievable that if you dare to put it in print, the vast majority of the populace may simply consider you a raving maniac and ignore what you have to say. I learned this lesson first hand the hard way back in 1972. George McGoveru was running against Richard Nixon for President of the United States,Nixon was in his fourth year of his first term in office and in the fall of that year McGovern was claiming on a daily basis that Nixon was the crookedest president in the entire history of America. It was too much for me. I figured McGovern must be offhis rocker and voted for Nixon. It was anerror I and many others have regretted to this day. Still, it was a lesson well learned, and in applying it today, frequently information is intentionally held back in this ,xcolumn and an article toned down in order to make it more ',lJpalatable and thus more believable to the reading public. You can rest assured that for every one thousand words this writer puts in print about Nye County polities, ten thousand would not suffice to tell the whole story. Now I am faced with a conundrum. It involves a matter of such importance that it must be told in all its ugliness, and how am I to do that and still have you believe it? I have decided to try a simple approach. I am going to make a very simple, very unbelievable statement and then use the rest of the column to back it up. My statement is: Nye County has a signed contract wi its selected independent auditor that requires the auditor to not tell the trtah about the fiscal condition of the county and, if he were to tell the truth, he would be in violation of the contract and the county could legally refuse to pay him. I told you, you wouldn't believe it! The situation is exactly the same as if you owned a business that turned over almost 50 million dollars in revenue a year and hired an auditor for $28,000 with the instruction to, "Don't bother worrying about whether or not any of the basic information I supply you with to conduct your audit is accurate or complete, you just leave that part up to me. Also, keep in mind that I don't want your audit to be done in such detail that you can give me any assurance as to whether or not any material errors, irregularities, illegal acts, including fraud, misappropriation of money or embezzlement is taking place. Oh, and by the way, let's change this little agreement we've had for the last couple of years and this year when you're doing my audit if you don't feel comfortable with it for any reason, you being a professional and all, you know, you don't even have to complete the audit and I'll pay you anyway." One has to wonder whether it costs a county government more to have an audit done of this type than it would for a real one and the reader could easily be forgiven if he or she is skeptical at this point as to the accuracy of the charges leveled so far in this column. In order to help alleviate any doubt in your mind, please consider the following excerpts taken from the three year contract Nye County entered into with its independent audi- tor, Dan MeArthur, on February 21, 1995: Page 4, section 3.1.1 of the contract states, "County is responsible for the'accuracy and completion of the basic information supplied to accountant." Page 5, section 4.2 states, "Risk of non-discovery: county hereby acknowledges that, because accountant will not per- form a detailed examination of all transactions of the county, there is a risk that material errors, irregularities or illegal acts, including fraud or defalcations, may exist and not be detected by accountant." Section 4.3 states, "County retains responsibilities: county shall retain responsibility, and accountant shall not be responsible for the county's financial statements, the mainte- nance of adequate records and internal control structure policies and procedures, the selection and application of accounting principles, and the safeguarding of assets." i Section 4.3.1 states, Said audits will not be specifically designed and cannot be relied on to disclose reportable conditions, i.e., significant deficiencies in the design or operation of county's internal control structure." To answer the question as to whether the financial state- ments provided to McArthur by the county to conduct his audits have been accurate in all material respects, one need only to examine the end fund balance of the Nye County general fund at the close of fiscal year 1995-96 which is shown on page three and page 133 of the fiscal year 1995-96 audit. In the months leading up to June 30, 1996 (the end of the fiscal year) the general fund bala.qce at that time had for several months been bouncing around between one million to well over $2.5 million in the red. I knew at the time that on June 30, 1996 the general fund balance stood right at a negative $1.3 million. Were such information to show up on a county audit it would constitute what is referred to as a "reportable condi- tion" of some magnitude. A "reportable condition" requires the state to take action that is potentially quite serious. It includes activity up to and including the state taking over complete fiscal and financial control of the county. As an example, it is for this reason that the state is now running Nye Regional Medical Center (NRMC) and the county is not. Anyway, for this reason I was quite curious as to how the county and its "independent auditor" were going to handle this problem. I had to wait seven months to findout, which is two months past the state mandated deadline for an audit to be due. On February 4, 1997 McArthur presented the fiscal year 1995-96 county audit to the Nye County Commission and gave a brief verbal report. Nye County Commissioner Cameron McRae then walked theauditor through a series of carefully constructed senteuces that the auditor was able to agree with. McArthur did bring it to the commissioners' attention during his brief report that at sometime during 1996 a sum of $996,096 had been "loaned" through a fund "trans- fer" was in addition to all the millions of Payment equal to Taxes (PETI') money that the commission had officially loaned to the hospital in Tonopah and when this information surfaced on February 4, 1997 it was the first time that the public and at least most of the commission was aware of it. THIS MAN'S OPINION by Brent Mathewson The fiscal year 1995-96 county audit has proven to be a thing to behold. The general fund balance on June 30, 1996 is identified as being a negative $34,754. This is a discrepancy with the truth of over one and a quarter million dollars. Pages two and three of the audit imply that the $996.096 unauthorized transfer out of the PETT account to NRMC should somehow count as "equity " in the Nye County general fund. This situation is exactly the same as if someone were to take a thousand dollars out of your savings account, without your permission, and then loan it to a deadbeat with whom they may or may not be in partnership with and who has not repaid one dime on any loan made to him in two decades, and then telling you that you should now consider this one thousand dollars as "equity" in your checking account. Just try writing a check against that kind of equity and see where it gets you. The audit completes the lie on page 133 when it identifies the "beginning fund balance" (nothing about any "equity" here) of the Nye County general fund for fiscal year 1996-97 as being a negative $34,754. If memory serves me correctly, the true amount that the Nye County general fund was in the red on that date was a minus $1,263,483. The reader might well be asking the question, "Can an audit be done in this manner and still abide by state law?" That's a good question and should be addressed. The terms of the contract that McArthur was operating under to conduct the fiscal 1995-96 county audit as stated in section 2.2 of the contract he was required to, "include tests of the accounting records of county and their procedures accountant deems necessary to enable him to express an unqualified opinion that the financial statements are fairly presented, in all material respects. In the Schedule of Finan- cial Assistance and on other assurances of compliance with laws and regulations prepared by county." As will be ex- plained, this section of the contract is critical. Please be aware, that an "unqualified" opinion by defini- tion is one that is, "not modified, limited or restricted by conditions or exceptions." In other words, to state the ugly truth if in fact the truth is ugly. This section of the contract (section 2.2) made the wording of the contract that McArthur had with the county, at that time, a legal document that complied with NRS 354.624-4 which is the Nevada law that deals specifically with this matter. Even though the contract was weakly written and gave no provision or assurance that the audit contracted for would have any capability of uncov- ering fraud of the most serious nature imaginable, no matter how loosely camouflaged, at least the auditor was required, by contract, to state an opinion on matters relevant thereto. The problem, at that time, was not with the contract but that the provisions of the contract were not fulfilled. On page 141 of MeArthur's fiscal year 1995-96 county audit he states, "As part of obtaining reasonable assurance about whether the financial statements are free of material misstatements, I performed tests of Nye County, Nevada's compliance with certain provision of laws, regulations, contracts and grants. However, the objective of my audit of the general purpose financial statements was not to provide an opinion on overall compliance with such provisions, accordingly, I do not express such an opinion." The failure of McArthufs audit, to comply with the terms of the contract, and thus Nevada law, is further reinforced on page 139 of the fiscal year 1995-96 Nye County audit. McArthur states in pertinent part, and in direct contradiction of his statement quoted in the above paragraph, that, "With respect to the internal control structure, I obtaincd lan under- standing of the design of relevant policies and procedures and whether they have been p in operation, andI agsessed control risk in order to determine my auditing procechaes for the purpose of qpressing my opinion on the general: purpose financi statements and not to provide an Ion on the internaicontroi structure. Accordingly, I do nat express such an opinion." : The latest insult in the matter of the Nye County audit, which should wake even the sleepiest of citizens to con- sciousness, occurred on September 16, 1997 at the Nye County Commissioners meeting in Beatty, Nevada. Item 18-J was buried in the consent agenda and Commis- sioner Bobby Revert made a tentative remark that it should be looked at separately instead of being approved without dis- cussion along with ten other items. Quick as a flash, the county manager's assistant, Rachel Nicholson, spokeup and said that the item called for no increase in fee to the county's independent auditor and simply required the implementation in the upcoming audit of the more rigid requirements found in the government Auditing Standards OMB Circular A-133 rather than the previous requirements found in OMB Circular A- 128. With this reassurance, item 184 submerged back into darkness. Nicholson's comment could perhaps most politely be described as shading the truth. Item 184 was and is nothing less than a major amendment to the county's contract with McArthur. The original contract required McArthur to complete the fiscal year 1996-97 audit no later than November 30, 1997, which happens to be a requirement of NRS 354.624-1. The amended contract does not even require that the audit be completed, although it does require the county to pay McArthur $28,100 for "engaging in audit activity." Strange but true! In the second paragraph of the amended contract, after assuring the county that "if our opinion is other than unqualified, we will fully discuss the reasons with you in advance," the paragraph ends with this final mind boggling sentence. "If, for any reason, we are unable to complete the single audit engagement, we will not issue a report as a result of this engagement." Unfortunately it does not end there. On three occasions in the amended contract McArthur pledges himself to give no opinion on matters of paramount importance. The fifth paragraph of the amended contract discusses tests of internal county controls and ends with this sentence, "Our tests, if performed, will be less in scope than would be necessary to render an opinion on the internal control and, aecordlngly, no opinion will be expressed." The sixth paragraph of the amended contract discusses tests of controls as required by OMB Circular A- 133 and ends with this sentence, "Our tests will be less in scope than would be necessary to render an opinion on these controls and, accordingly, no opinion will be expressed." The eighth paragraph of the amended contract discusses compliance with laws, regulations, contracts, and grant agree- ments applicable to Nye County and ends with this sentence. "However, the objective of our audit will not be to provide an opinion on overall compliance with such provisions, and we will not express such an opinion." If there are any readers out there that are wondering whether this contract complies with the laws of the State of Nevada that can be found in NRS 354.624, the answer is a resounding "definitely notl" For those citizens, who are not comatose, and are wonder- ing what you, as an individual, can do about this matter the answer is, "more than you might believe." The Department of Taxation of the State of Nevada is in early stages of an investigation of the financial condition of Nye County. Barring a derailment of this investigation, for political reasons, it will progress until it comes to its natural and necessary conclusion with all that may imply. I urge you to write Michael Pitlock, Director of the Department of Taxation, State of Nevada, Capitol Complex, Carson City, Nevada, zip code 89710, and ask Mr. Pitlock to please, at Nye County's expense, have his department's inves- tigation including a full blown audit of Nye County's true fiscal and financial condition. Make your letter brief. Make it concise. But make it. As this long column comes to its close, and I re-read the words that appear on the pages in front of me, I realize that once again, most of the information available has been held back. But that's alright. You probably wouldn't have been able to believe it anyway. That is this man's opinion. copyright 1997 by Brent Mathewson