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City's books under review: Auditors checking financial reports after $25 million in errors
(Dallas Morning News, The (KRT) Via Thomson Dialog NewsEdge) May 8--Outside auditors have reopened the city of Dallas' books after about $25 million in mistakes was discovered in city financial reports for the last three fiscal years.
Experts say the errors were a "huge oversight" that makes them question the accuracy of the city's accounting and could potentially hurt the city's efforts to borrow money.
Dallas is already at least a month behind in releasing its audited financial report for fiscal 2005, and this problem is expected to delay it even longer, perhaps for as many as 60 days or more.
"It's in our auditors' hands," said David Cook, the city's chief financial officer.
The report will now probably come just months before the city asks voters in November to approve more than $1 billion in bond money. The interest rate on those bonds will be partially determined by investor confidence in the city's financial reporting.
"Is this just a mistake or is there a fundamental control issue? That's the thing that could hurt their bond rating," said Wayne Shaw, an expert in financial disclosure at Southern Methodist University's Cox School of Business.
The city admits there were errors. Here's how they occurred:
American Airlines Center went on line during the final two months of 2001, and city accountants correctly calculated two months of depreciation.
Depreciation is an accounting process that shows the decline in value of an asset over time.
"But for 2002, 2003 and 2004, we depreciated it for two months instead of 12 months. Whoever was taking care of doing the adjusting entries for depreciation looked back at what was done in 2001 and did it again and again and again," said Maria Alicia Garcia, director of Dallas' office of financial services.
What that means is that the city underreported about $25 million in depreciation on the building. That resulted in an overstatement of nearly 4 percent of the total capital assets of $694 million reported in 2004 for the Convention Center enterprise fund, a stand-alone business entity that includes American Airlines Center, the Dallas Convention Center and Reunion Arena.
On Feb. 20, The Dallas Morning News made an open records request for the fund's accounting ledgers for the three years. The city still has not released the information.
Edward Scott reviewed the ledgers and found the error after he became city controller in December. He notified the outside auditing firm, KPMG. The person responsible was disciplined, according to Ms. Garcia.
Experts say the fact that the mistakes went unnoticed for years also raises questions about the thoroughness of the outside auditor.
"You would think that auditors would catch it," said Suzanne Lowensohn, an accounting professor at Colorado State University and a former KPMG auditor. KPMG declined to comment on Wednesday, citing client confidentiality.
Steve Murray, a bond-rating analyst with Fitch Ratings, said mistakes of this nature would be a concern.
"It's something we'd certainly take note of and pursue with a line of questioning. It would be a part of the analysis going forward," said Mr. Murray, who rates bonds that are issued to fund convention centers. He does not rate the Dallas site.
Mr. Cook played down the significance of the errors.
"Twenty-five million dollars is a lot of money, but it's important to note it's not real money," he said. "Our ability to pay debt on our bonds is not impacted. It's a book entry. We regret it, it shouldn't have happened, but it's not the same as not accounting for $25 million in cash."
The Convention Center enterprise fund has showed losses of a combined total of nearly $15 million over fiscal years 2003 and 2004, although that total would have been greater if the American Airlines Center depreciation had been recorded correctly.
The Convention Center itself has suffered from increased competition, falling revenues and fewer bookings, while Reunion Arena has lost more than $1 million in city money annually for several years, according to news accounts. To help buoy finances for the next fiscal year, city officials have said that the fund may need as much as $12 million from the city's general fund.
The depreciation errors follow other questions about the city's financial reports. The News reported in February that internal and external auditors were re-examining whether there were errors in the accounting for the Dallas Aviation Department, which oversees Love Field, Executive Airport in southern Dallas and the Convention Center heliport.
Experts say depreciation accounting is pretty basic.
"You should never make this mistake. That means nobody is following up, that there is a fundamental flaw in the internal control system," Mr. Shaw said. "What concerns me is that there wasn't someone who was checking on this. It should have passed by a couple of sets of eyes. If it's passing two or three sets of eyes, then you fundamentally have problems with the players in the job."
City officials say they've made changes to their internal procedures to keep it from happening again.
"Mistakes shouldn't happen. We regret that it did," Mr. Cook said.
Ms. Lowensohn agreed that this type of mistake shouldn't occur.
"As taxpayers, you don't like to hear that there is a $25 million mistake," said the professor, who teaches government accounting. "Our introductory accounting students know how to calculate straight-line depreciation.
"This is probably going to end up in the textbooks as an example of a huge oversight."
E-mail teiserer@dallasnews.com
and kfairbank@dallasnews.com
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