Ellendale

State audit: Ellendale finances, records, payroll a mess

Betsy PriceGovernment, Headlines

Ellendale

The Ellendale Town Council should make sweeping changes in a lot of its financial and town paperwork to recognize and maximize opportunities and to reduce problems, the Delaware Auditor has said.

A¬†state auditor’s report posted Tuesday on the department’s website says, in essence, that the town of Ellendale’s financial records, handling of cash, payroll and even basic operational details and practices are a mess.

In a lot of cases, they look like growing pains in a small town experiencing rapid growth typical of Sussex County.

It had 400-plus residents in 2020 and now has 527, but it’s location along the route to Delaware’s beaches has contributed to rising property values, making property and realty transfer taxes its prime economic driver, with developments annexing into the town.

The Ellendale council elected in 2023 inherited the problems, the audit says, and asked for the audit of city finances from 2019 through 2022.

Efforts were not successful Tuesday to immediately reach Tom Panus, president of the town council, for comment. Efforts were not successful to reach Mayor William Clay Walton.

The explosive growth of property values and tax revenues represent opportunities, according to the audit.

But, it said, town operations and record keeping, haven’t been done to normal standards, and that’s preventing Ellendale from understanding what is happening or from seeing or implementing changes that should be made.

The town council already has hired a bookkeeper from a certified public accountant firm with expertise in QuickBooks accounting, the audit said. The hire should strengthen financial integrity, streamline processes and position the town for better financial management, it said.

Ellendale Performance Audit 6.24

Ellendale bullet points

Among problems/solutions cited in the 43-page audit:

  • Ellendale doesn’t have written descriptions of empl0yee, elected official or volunteer slots and does no background checks on officials, workers or volunteers.=
  • Inconsistent property assessment¬† practices and a lack of documentation increase the risk of errors in tax processes, potentially leading to errors in financial records and reporting.¬†Inaccurate property assessments can lead to unfair distribution of the tax burden, with some property owners paying more or less than their fair share (affecting the fairness and integrity of the tax system) and this may result in potential revenue shortfalls or overages.
  • Loose controls over the physical security of cash increases the risk of cash being misappropriated without detection and accountability. The town had missing cash receipts and supporting documentation resulting in errors in accounting for cash receipts in the bank statement and accounting system and indicators of potential fraud. Financial reporting is complicated by posting transactions outside of the accounting period and the inability to properly reconcile receipts to the general ledger and bank statements.
  • Employees received payroll compensation without proper documentation, and some were allowed to sign their own paychecks. Additionally, the inaccurate withholding of federal taxes in 2022 went unnoticed. These practices pose unintended financial, compliance and reputation risks, and errors or potential fraud in the payroll records may not be promptly.
  • The town’s failure to maintain strong recordkeeping practices, provide proper supporting documentation, enforce dual signature requirements, and prevent employees from signing their own paychecks poses a significant risk of fraudulent activities. Without independent verification to confirm the legitimacy of expenditures, Ellendale is vulnerable to financial losses and damage to its reputation.
  • Without a second signature for validation and supporting documentation verification, there is an increased risk of errors in check disbursements including payroll processing, which could lead to overpayments, underpayments or other inaccuracies which can negatively affect the accuracy of financial reporting.
  • The absence of clear and documented policies and procedures may lead to non-compliance with the Town Charter, potentially facilitating nepotism or favoritism.
  • The absence of dual signature weakens internal controls, making it easier for unauthorized or inaccurate transactions to occur without detection. Without a second signature for validation, there is an increased risk of errors in check disbursements, leading to overpayments, underpayments, or other inaccuracies which can negatively affect the accuracy of financial reporting.
  • Ellendale does not have policies that mandate segregation of duties or the implementation of compensating controls and has historically run with limited personnel. Proper separation of duties is one of the most effective internal controls measures any organization can take to increase the chances of detecting errors and reduce the risk of fraud. When any single person has too much control over a system, transaction(s), or critical functions, it creates an increased opportunity and likelihood that manipulation of system data and transactions, errors, misappropriations, or fraud could occur without detection.
  • The absence of clear policies, procedures, and processes leads to operational and financial inefficiencies, inadequate resource allocation, inconsistent practices, accountability issues, lack of clarity, legal and compliance risks, as well as errors and mistakes.
  • The council did not have the oversight and accountability mechanisms in place to ensure compliance. The ambiguity in the language and writing style of the Charter created confusion through differing interpretations. Effect: The gaps in a structured oversight mechanism creates legal and governance concerns. There is a potential for legal liability, ethical dilemmas, public trust erosion, reputation damage, and operational efficiencies.
  • Ellendale has followed historical practices in how they use petty cash rather than creating and implementing a formal, clearly defined, and communicated policy and procedures on petty cash management. A cash count of petty cash during the audit found a minor $5 discrepancy. Weak controls create an environment that is conducive to fraudulent activities, such as submitting false reimbursement claims or manipulating and misusing petty cash records. Insufficient oversight would not prevent unauthorized withdrawals.
  • The absence of accounted records creates gaps in the historical documentation of council activities, impedes the clarity of discussions and decision-making processes, making it challenging to fully grasp the context of Council activities. This condition adds to the difficulty in tracking the progression of initiatives and issues over time.
  • The loss or mismanagement of meeting package records may also have various consequences, affecting various aspects of governance and public trust, including
    compliance issues and potential legal consequences. The inability to access important records can frustrate the public and lead to belief of ineffective governance and erode trust. The missing signoffs and approvals are indicative of potential gaps with the validation process and can raise questions about accuracy and integrity of the information and could lead to concerns about the validity of decisions made during council meetings.
  • The lack of a risk assessment process leaves the Town exposed to unmanaged potential risks. The lack of a structured process for setting up or updating internal controls results in potential inefficiencies, weak existing controls, inadequate resource use, issues with accountability, risk of errors, and mismanagement all of which affects the reputation of the Town.
  • Incomplete or missing personnel files or failure to perform compliance verification processes can result in non-compliance with labor laws and regulations and inadequate understanding of employment laws may expose the town to legal risks (whether compliance violation or employment lawsuit) and reputational risk if an employee‚Äôs personal information is compromised.
  • The town can experience revenue imbalances and financial instability because of a failure to adjust fees in response to changing economic conditions, affecting the town‚Äôs ability to fund, sustain and improve municipal services.
  • Insufficient revenue may also lead to deferred maintenance of Ellendale’s infrastructure and facilities. Further, certain segments of the town population or businesses might bear an inequitable burden if fees are not adjusted to reflect the changes in the cost-of-service delivery.

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