Flood of Errors Drained Water Accounts Audit Report Cites Accounting Snafu, Lack of Oversight by Managers Errors: Auditing Firm Recommends Hiring Better for Top Posts

Daily Herald (Arlington Heights, IL), March 18, 2010 | Go to article overview

Flood of Errors Drained Water Accounts Audit Report Cites Accounting Snafu, Lack of Oversight by Managers Errors: Auditing Firm Recommends Hiring Better for Top Posts


Byline: Jake Griffin jgriffin@dailyherald.com

A slew of mistakes and bad decisions led to the DuPage Water Commission completely depleting its reserve funds, according to the 64-page confidential forensic audit report obtained by the Daily Herald.

The report was compiled by the commission's special counsel, Jenner & Block, which was hired after the missing reserves were discovered in October 2009. They did not find evidence of any illegal activities.

The commission distributes Lake Michigan water to more than two dozen municipalities and agencies.

The report chronicles the negligence of former financial administrator Max Richter, lackadaisical financial oversight by former General Manager Bob Martin, and the internal division among the six municipal-appointed commissioners and the six county-appointed commissioners that helped keep the fiscal errors from being revealed.

The report was released to the commission March 2. In its wake, Martin resigned last week after 23 years with the commission, and Treasurer Richard Thorn resigned Tuesday. The water commission has yet to make the report public.

To avoid a repeat, the report makes several recommendations. They include appointing future commissioners with financial expertise, making the treasurer a paid nonstaff position responsible solely to the commission, more detailed and consistent financial reporting, restricting access to accounting programs, and segregating financial duties regarding depositing and reporting.

Bad accounting is essentially the root cause of spending all the commission's reserves, which were falsely reported to be at $109 million in 2007 but were actually just $69 million. Believing they were flush with cash, the commission approved a $40 million rebate to municipalities and a rate reduction in February 2007.

That depleted the reserves to $29 million, but commissioners believed there was more than double that amount left in the reserves. A capital improvement plan was approved that spent the remaining funds.

Declining sales tax revenues that were sometimes spent on operations against commission policy, faltering investments and the sale of water to customers at a rate cheaper than it was being purchased from Chicago also bled the commission's funds, the report states.

But it was Richter's "intentional misconduct and gross negligence" that investigators say is chiefly to blame for the fiasco, though the report states "there is no clear and convincing evidence of fraud."

Richter's time

Hired in 2005 as the commission's third financial adviser since its inception in 1985 -- and second in less than a year -- Richter received good reviews from Martin during his first two years, according to the report. But by 2008, his performance began to slip and it was noted in later reviews that Richter "needed to make fewer errors in financial reporting."

Richter had been hired amid a state legislature-approved $75 million "raid" of the commission's reserves by the county, the report noted. For five years starting in 2003, the county was to receive $15 million a year. Richter apparently didn't have a firm grasp of the situation and his 2007 budget forecasts included a continuation of the $15 million payments to the county essentially in perpetuity.

That error was caught by Commissioner Allan Poole, who wrote to Martin in December 2006 apprising him of Richter's "snafu." But instead of just deleting the entry, Richter added $15 million to the previous year's beginning balance. That move began the over-inflation of the commission's reserve fund.

Three more accounting errors that added phantom $15 million and $12 million entries to reserves while subtracting $2 million created the illusion of $40 million extra in reserves, according to the report.

Richter's failure to fully implement his department's transition from financial reporting based on Excel spreadsheets to an accounting software package also allowed the mistakes to grow and fester, the report states. …

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