After an independent auditor reported on Dewey’s financials at Dewey’s town council meeting Aug. 10, Commissioner and former Mayor Dale Cooke said he believed the town has been lax in its oversight of the police department and lifeguards, which resulted in mismanagement of funds.
“I don’t have absolute proof, but my gut feeling is that neither the police nor lifeguards took any money, if you want to put it that way,” he said. “I don’t know that for a fact because we didn’t understand fully that the accounts existed or there was a safe that kept money aside, but it is truly in my heart a gut feeling that nothing immoral or illegal happened.”
Members of the public strongly disagreed.
Before independent auditor Roy Geiser of TGM Group presented the fiscal year 2018 audited financial statements and its report on applying agreed-upon procedures for council’s discussion and possible vote to accept, town council allowed public comment.
Dewey property owner Gary Talley said the money - and assets - received from a federal military surplus program through which the police department acquired hundreds of items belong to the citizens of Dewey Beach, not the police department.
“It is your fiduciary responsibility to do what is in the best interest of the citizens of Dewey Beach,” Talley said. “We are demanding a full and complete audit of all money and equipment in the 1033 program and want all questions answered - who, what, when, where, why, how and how much.
“A full and complete audit is the only way to resolve this matter and get this terrible situation behind us,” Talley said.
Audit committee member and former Dewey Mayor Diane Hanson said she respects TGM group, but noted items were left out of the report. She said a vote to approve the financial reports was not on the audit committee’s meeting agenda Aug. 3.
Because there was no vote on the agenda, committee members could not express their concerns, she said. “There were certainly a lot of frustrations expressed at that meeting,” Hanson said. “Two members ended up resigning, and I think we lost two very intelligent and qualified people.
“If it had gone to a vote, I would have been the third vote to say no,” she said. “Three members of that committee would have said they do not approve this and recommend you do not approve it.”
Audit committee members Diane Tenhoopen and Dennis Trencher resigned at the Aug. 3 meeting.
Dewey’s former financial director Nancy McCloskey, who left in 2017, said during the four years she held the position, she audited and reconciled bank records every month. She said money from the surplus equipment sold by the police department was not deposited in town accounts.
“There were no police surplus funds given to us and no lifeguard money,” she said.
McCloskey said the town had separate accounts where donations for the police department and lifeguards were deposited and documented. She said after one lifeguard tournament, lifeguards submitted receipts for reimbursement from this account.
“They had access to these funds. There was no need for them to have a separate account, and there was no record or communication to say the lifeguards were keeping their own bank account or the police department had a surplus fund,” she said.
In a February 2018 letter to the Cape Gazette, McCloskey said the town only became aware the police were auctioning military equipment in early 2016 when police submitted a large check to be deposited into its grant account. She said she had no record of a grant that was awarded the funds, and asked Chief Sam Mackert for details of the program to ensure the town was following proper accounting standards, but nothing was submitted to her.
“Any other information is absolutely false, and I find it personally harassing to read information that has been scuttled under the carpet by the town and not hold these people accountable,” she said. “I’m almost tempted to put a lawsuit against the town because it’s a reflection of my performance, and also TGM audited and gave the town verification of all information.”
Former audit committee member Dennis Trencher said he is concerned about the lifeguard account.
“The audit committee had been informed the lifeguards started a 501c3 nonprofit, and there’s no record of it,” he said. “I’ll just leave it that way, because to me, that’s a big issue.”
Dewey investment committee Chair David Moskowitz, a chartered financial analyst and certified public accountant, said he did not understand why the TGM report accounted only for items valued at $5,000 or more. He also said Geiser was not licensed in Delaware, but in Maryland, which has easier requirements.
Dewey Mayor T.J. Redefer told him that matter was not up for debate, and later said the town has been using TGM Group as its auditor for many years.
Moskowitz said later in an email that fair market value is not the same as depreciation.
“Items were given a haircut based upon depreciation so I think many items were put as 20 percent of their acquired value for the $5,000 test,” he said. “I heard there were tractors acquired which were sold for 50 to 85 percent of the fair market value so this 20 percent would have the effect of minimizing the issue. How was this decided and was it done in a public vote? This methodology leads into my second point.
“With all the questions of internal controls why weren't items under $5,000 looked at via sampling? Otherwise you are telling people to just steal items below $5,000 and no one will care. I find this odd. Who decided on not sampling items below $5,000 and was this done in a public vote?
“I believe the way Dewey goes forward is to do a full audit of the known issues,” he said. “It would also be preferable to have an open RFP for Dewey to choose a different auditor for this task and audits going forward.”
Audit committee Chair Larry Silver said the agreed-upon procedures work was not an audit, but an agreement between the town and TGM to examine certain issues, specifically an internal control review of the town. He said the committee decided in December against an expensive forensic audit.
Silver said he forgot to put a vote on the committee’s agenda, so the committee will meet Aug. 17 for a final vote. He said he asked Tenhoopen and Trencher to stay on the committee to vote but they declined.
Silver said two major adjustments to the town’s financials were made from the previous fiscal year. One was to put assets from the military equipment acquisitions onto the town financial statements.
“They had never been actually on the town’s financial statements. As Nancy said, all four bank accounts at Fulton Bank had always been on the town’s financial statements, but the assets were not there,” he said.
Silver said the lifeguards had roughly $25,000 in a bank account.
“They thought they had a 501c3 tax-exempt organization. They did not, or at least we could find no record of it with the IRS,” he said.
Silver said the lifeguard bank account is now on the town’s financial statements. He said the committee will discuss and make suggestions on the auditor’s communications letter that evaluates the town’s internal controls at the committee’s Aug. 17 meeting.
Still, Silver said, auditors gave the financials a clean opinion.
“That’s the key,” he said. “It really doesn’t get any better.”
Report findings
Geiser explained the nine items detailed in the agreed-upon procedures work.
One key finding is that Geiser said he found no proof the lifeguards’ off-balance-sheet account was a nonprofit. He summarized the account’s statements over a five-year period and found a little over $23,000 in the account, which was turned over to the town. The draft report stated a sample of 12 deposits and 11 withdrawals were examined and support documentation was supplied, but it was not in a form that could be reconciled with the bank statement.
Additionally, Geiser said he found donated assets given to lifeguards, including a Kawasaki mule all-terrain vehicle.
“The finance department didn’t know about it. Let’s put it that way,” he said. The donated assets were placed on the books for transparency and accountability, he said.
Geiser examined the compliance of two bank accounts earmarked for police grants. He said funds need to be transferred from the grant account to the town’s operating account to reimburse payments, calling it an accounting oversight. However, the draft document stated a state agency review could perceive this as a noncompliance of the grant requirements.
Geiser’s report examined cash receipts and disbursement logs for money found in the police department’s safe and deposited into the town’s operating count in January. Geiser investigated the need for the safe, which was determined to be used for lost and found or confiscated items.
A surprise safe examination in April found miscellaneous items, including several handguns. One had been donated to the department. No explanation was provided for the other guns.
Geiser said he counted and photographed LESO military surplus equipment in a storage area on Cedar Grove Road in Lewes. He said some items were basically scrap metal and not worth $5,000; others were in surprisingly good condition.
“A lot of work went into unraveling all the hearsay,” he said. “We had to come up with a line in the sand, so we said the cap policy of the town is $5,000, so anything under $5,000, we’re not going to track that down.”
Geiser said it was difficult to determine the value of the used military equipment. He said he obtained the acquisition price paid by the department of defense, and decided to use 20 percent of the acquisition price to value the items, rather than have everything appraised.
He also examined vehicles on the town’s auto and inland marine insurance policies.
To find equipment that may have been sold and not accounted for, Geiser obtained transactions from Wilson’s Auction Sales. Smaller, less valuable equipment is auctioned at a Lincoln location, and larger, more valuable items are auctioned in Harrington.
Geiser said he focused on larger equipment and worked with Wilson’s accounting department to search for checks cut to Dewey Beach, Dewey Beach Police Department and individual officers’ names, and found nothing previously unreported.
However, the draft report concluded sales at Wilson’s Lincoln location were disbursed in cash, so Wilson was unable to provide records of disbursements.
Commissioner Gary Persinger said there were four diesel-powered generators acquired through the military surplus program with an acquisition value of $25,000 each that would have been valued at $5,000 after the 20 percent reduction in acquisition price. Geiser said he did see them but did not include them because they would be worth less than $5,000, and later clarified the town has not had the generators for LESO’s one-year holding requirement. He said the generators would potentially be capitalized in Dewey’s 2019 fiscal year budget.
Persinger said other items individually might be under the threshold but when grouped together, would be valued at over $100,000.
“I fully understand the need to make a decision on threshold value, but there is some dissatisfaction at not having a complete look at what was obtained, used and sold by the police department,” he said.
Geiser said, “All the money is there. In summary, at the end of the day, it might not be exactly in the right bucket, but it is all accounted for.”
Commissioner Paul Bauer said at some point, the investigation has to end.
“We don’t have a limitless supply of money,” he said. “TGM did what we asked and we got what we asked for.”
Gesier said he could not confirm he saw all of the military equipment because some had been bartered or exchanged for services and was no longer in the town’s possession. He reconciled all large pieces of equipment.
Cooke admitted a lack of oversight contributed to financial improprieties.
“I know we’ve been lax, the town and I as former mayor,” he said. “Up until this blowout we didn’t keep tabs on things and didn’t ask for lists. In my opinion the town perpetuated an environment of ‘do what you want, just make sure it doesn’t cause us any problems.’”
Commissioner Courtney Riordan said he agreed with Cooke and was aware the beach patrol had its own account.
Commissioners voted to accept the agreed-upon procedures report. A separate motion proposed by Persinger was approved after accepting the report and sets a timeline for disposal of LESO equipment not needed by the town.
Within five months, the town manager and police department will identify LESO items that can be used by the town, and will submit a list of these items and their use to commissioners.
Within eight months, all remaining items will be disposed of, and any funds received will be provided to the town and deposited in the police restricted fund. The town manager will set a threshold value for commissioners’ approval, and will report the value of each individual item exceeding the threshold to commissioners.
Commissioners also voted to accept the audit report. A second motion Persinger proposed was approved to direct the town manager to evaluate recommendations in Phase 1 of the agreed-upon procedures report, including revisiting council’s decision to hire an accounting firm rather than a finance director, and developing formal accounting procedures.
Bauer said he was pleased with the auditor’s report.
“We plan on immediately taking up the recommendations suggested and move this town forward in a positive way,” he said.