Audit reveals significant problems in Ellendale finances

Ellendale’s recent audit showed significant problems with payroll, cash receipts and more

In January, the Town of Ellendale replaced three incumbent members on its five member council. William Clay Walton, Thomas Panas and Joseph Beck joined Michael Workman and Virginia Weller on council. The new council requested that the State of Delaware Auditors conduct a performance audit to evaluate the efficiency and effectiveness of town operations. This audit covered 2019 through 2022.

“The 2023 Town Council inherited at town with both challenges and opportunities,” the report from the state auditor reads. “The substantial growth in Ellendale from real estate developments presents opportunities for increased tax revenue and increased property values as the growing town attracts new businesses. The challenges facing Ellendale include establishing a robust infrastructure, institutionalizing governance with adequate resources and creating comprehensive written strategic plans, budgets, policies and procedures.

The report credited the newly elected council president, vice-president and treasurer for taking significant steps to implement changes throughout the audit. During the process, auditors observed council members actively making small improvements to institute proper controls for town operations. The report continued, describing governance of the town and noting that the town employees include a Town Clerk, Police Chief, two part-time police officers and a maintenance worker. An unpaid tax collector was hired, and the position vacated while the audit took place. The town uses contracted services for IT, accounting, tax services and the Town Solicitor.

The first issue discovered in the audit included problems with property tax computation. The charter for Ellendale states that the tax rate is charged per $50 of assessed value. However, there were times that the town applied the rate per $100 of assessed value, but doubled the taxation rate.

“The explanation given was that the increased rate was to increase revenue, but by calculating the rate based on $100 of assessed value, the revenue remained static,” the auditors reported. “We recalculated the invoiced tax on real estate using both assessed value calculations and found that 14 of the 71 (20 percent) did not match our calculations.”

In addition to incorrect tax amounts, 21 percent of the invoices had terms that were inconsistent, 28 percent were not generated in a timely fashion, 77 percent had due dates that were the same as the invoice date and 8 percent had a mismatch of parcel identifiers compared to county records. Additionally, 100 percent of the delinquent accounts had payment billing errors, four did not have a late fee assessed, nine had finance charges calculated incorrectly and eight had no finance charge assessed. There were 13 accounts modified on the original invoice rather than having a new invoice generated. The town also did not keep complete records of all billing invoices, supporting documents or related correspondence regarding real estate property and capitation tax.

“Ellendale relies solely on the annual property tax roll provided by the county for assessing property values and obtaining taxpayer information,” the report continued. “There is no established process to independently verify the county information and while the town receives monthly change updates from Sussex County, there is no ongoing maintenance process to ensure timely incorporation of changes in taxpayer data. There is no mechanism for accurately obtaining the number of residents over the age of 18 per household for the capitation tax.”

The auditors recommended that the town develop a comprehensive property tax policy and procedure manual and consider the addition of software, such as QuickBooks, to streamline the process. In addition to problems with property taxes, the auditors found that Ellendale had insufficient cash handling controls.

“Testing of a sample of 40 cash receipt/deposit documentation found various issues,” the report said. “Documentation for 34 cash receipts/deposits were missing and the miscellaneous receipt book records prior to July 7, 2020, were unavailable to the auditor. Collections received through the mail are not recorded at the first point of collection by use of amail log or other means to log and track payments, both cash and check, received by mail. Two checks were missing endorsement. Council president only endorsed six checks. Checks received directly by mail or in person are not date stamped upon receipt. The pre-numbered payment receipt for each payment received are not used consistently for all payments.”

The report continued with multiple additional cash receipt issues.

“Tax receipts are not recorded in the receipt book, there have bene instances where town residents claim to have paid in cash but there was no evidence of that payment and the town has no record of the receipt of the payment,” the auditors continued. “There is no daily reconciliation of the number of collection payment receipts to the accounting system, the accounting system reports available to manage cash receipt transactions are not used and although the accounting system showed a bank account reconciliation monthly, the process did not detect transactions that were not posted to the accounting system, the bank account or posted in the wrong accounting period. Ten cash receipt payments tested were recorded in the incorrect accounting system because an effective date of receipt was not used.”

The auditors recommended that a process be developed to deposit cash receipts and enter the in the accounting system immediately and that supporting documentation be kept on file. They also suggested daily, weekly and monthly reconciliations between the cash receipt book, bank deposits and statements with the accounting system to ensure accuracy.

The payroll processing structure also had control gaps and inconsistencies. Currently, the payroll process shas no secondary review for accuracy, completeness and validity nor does it include a post payroll review and reconciliation.

“Testing of 36 payroll cycles and seven employees during the period of 2019-2022 found exceptions which are indicative of problems in the internal control system and a lack of standardization,” the report read.

Some of the discrepancies included on supervisor approval in just under 32 percent of the cycles reviewed and no employee approval almost 41 percent of those reviewed. Of 36 payroll records reviewed, almost 40 percent had payroll checks with signature problems with 11 signed by the employee who received the check and three signed by someone not authorized to sign. Compensation was also an issue during the audit.

“A total of $14,200 was paid to a council employee for the three year period from 2019 to 2021, yet the employee only worked part of 2021 and there were no supporting records authorizing those payroll payments. One payroll record noted a salary rate of $1,887 per hour,” the report said. “Payroll checks were paid in advance of the normal payroll cycle for eight of 36 payroll cycles and four out of 36 payroll records were missing the original paystubs.”

There were also issues with the pay periods for payroll cycles and out of check number sequences of payroll checks. One individual reported she had not had federal withholding deducted from her check and a review found that there were no 2022 federal taxes withheld for that individual. Withholdings did not begin until April 2023 when a new W4 was updated and signed. The auditors recommended stronger oversight of payroll process and controls as well as clear written policies and procedures for payroll.

“The town did not follow town charter procurement requirements, expenditures were not supported with documentation, and all approval requirements were not enforced,” the auditors found. “The town needs to enhance oversight of cash disbursements and expenditures. Without access to key supporting documentation, the town cannot effectively identify errors, whether intentional or accidental in the expenditure and procurement process.”

Unsupported and unapproved disbursements and expenditures found included debit card purchases without a required second signature, lack of documentation for debit card purchases, reimbursements for cell phones, personal vehicle gas expenses, cell phone bill payments for former town presidents, payments for a computer tablet and unexplained paving expenses for the Ellendale Fire Hall parking lot. Payments were mislabeled or not labeled at all in the accounting software and evidence that the town was bypassing its two-signature requirement on checks by using debit cards for purchases. The cards were issued to employees whose names were not listed on the card.

Other findings were that the town was not following procurement requirements for purchases exceeding $10,000 and that they discovered instances where there was no documentation to demonstrate compliance with town code. A review of cleared checks found $70,742.61 in checks that did not have the required two signatures and $32,717.33 In payroll checks signed by the employee who received them. The auditors recommended better oversight of all procurement, cash disbursements and expenditures.

There were several reporting and communication issues noted by the auditor as well as notations that council did not approve a budget for 2023. The town responded to the auditor with details on how they were addressing the concerns.

“The town has outsourced payroll processing to the Godwin Firm, PA and have updated the payroll processes to include Direct Deposit for employees,” Thomas Panas, President of the Town Council, wrote. “All personnel files have been updated to include the required forms, contact information and passwords associated with town computers. The files are maintained in a locked file with restricted access. All candidates and employees for the Town of Ellendale must successfully pass a background check and complete an Ethics form. The charter will be amended to reflect this requirement.”

Panas continued.

“Employee bonding has been updated to include current council members, Town Treasurer and Town Clerk. Prior council members or employees have been removed,” Panas wrote. “The town continues to update the website, as well a expand the information available on the site. This includes all agendas, town notices, the town charter town code and related forms. Petty cash has been eliminated and replaced with a debit card that requires sign-out and receipt documentation for each purpose. The town has expanded electronic records management for building permits and licenses. Minutes for public meetings are stored in respective electronic files.”

Panas wrote that the final steps are in progress to relocate banking to Community Bank and the town recently received an electronic check deposit machine as well as credit card availability. All signing authority has been updated and completed with two signatures required for every check and, n the event a second signer is not available, full disclosure is given at the next council meeting. Council also requires a monthly report from the Treasurer to be presented at each council meeting.

“All job descriptions, duties and responsibilities, as well as a transition plan will be available in written and electronic form,” Panas wrote. “All policies and procedures are being reviewed and will be available in both written and electronic form. Cash receipts are submitted with the payroll information and a separate check is issued by the accounting firm. Cash purchases are discouraged by using the debit card. Property tax balances are being reviewed and will be addressed, per the charter, on a regular basis. Capitation taxes will be removed, and the charter amended accordingly.”

The town is currently undergoing an asset inventory and warranty information will be stored alphabetically and the town is working with the Office of State Planning to develop a strategic plan. A budget was to be reviewed by council by June 1, 2024, and all future budgets prepared following the town charter.