City audit underway, auditor for hire

Sep. 25—The type of audit a financial company that has been auditing the city for 10 years performs is likely to capture only 7% of fraud, city councilors learned during the firm's presentation at the finance committee meeting last week.

As the Norman City Council prepares to hire an internal city auditor in the coming months, the finance committee learned that while BKD's audits are designed to detect large scale fraud, it does not conduct forensic audits which are designed to detect small scale fraud.

"Our audit is not designed to find fraud like a forensic audit that you think of," BKD partner Joel Haaser told the committee. "Usually with a forensic audit, you know of issues that are going on and you take a very deep dive wherever you think fraud is going on."

BKD's fraud detection can identify large swindles, such as $1 million, but not smaller amounts in the few thousands, Haaser said. Those types of fraud often surface on a tip.

"In general, 70% of all fraud are detected by internal tips," Haaser said. "That's where your internal audit employees [get] into and having a secure hotline that they can call to report what's going on. Unfortunately, under external audits, that number is about 7% of fraud that is detected by the external audit. It's just not designed to catch those types of activities."

City Financial Services Director Anthony Francisco told the committee it was the city's internal control processes that revealed an employee was using the purchasing system to make personal purchases. The loss ended up costing the city around $4,000, he said.

While Francisco didn't name names, city employee Melvin Gene Gore was charged with embezzlement for allegedly purchasing $1,380 in unauthorized purchases, The Transcript reported in 2018. During a Norman Police Department interview, Gore confessed to making personal purchases between 2013 to 2018 and later pleaded no contest in court.

He completed a deferred sentencing and probation agreement that ended in 2020.

External vs internal audits

Francisco told the finance committee that it also served as the city's audit committee, but hiring an internal auditor will serve as a separate function from an external auditor. He noted the city's in-house auditor would conduct forensic audits.

An internal and external auditor are different functions.

The comprehensive audit BKD performed judges the financial health of the city and its performance in the use of procedures, such as those implemented to prevent fraud.

"In our external auditors are auditing our external controls and the financial position statements of the city to state that all material aspects fairly represents the financial position of the city at a given point in time," Francisco said.

In an email from Francisco to the Transcript, he clarified the differences between an external and internal audit in detail.

"The basic goal of the Annual Comprehensive Financial Report is a financial statement audit; an audit of the financial position/health of the City and its various sub-components as of the end of the fiscal year," he said. "The intent is to gauge the financial health of the City and to make sure that the financial statements of the City fairly reflect the actual financial position of the City in all material aspects. The audit also examines the internal controls established by the City administration to prevent any material instances of financial fraud from being perpetrated, or to better ensure that any fraud will be quickly detected and any financial losses minimized."

Forensic audits are targeted to departments.

"Forensic audits are performed in specific areas, as opposed to the comprehensive financial audit performed annually in response to state law, accounting standards and debt covenants," Francisco said.

The city's internal auditor will not mean it can forgo external audits because of state law, Francisco said.

While not all cities obtain glowing reports from external auditors, for the last 20 years, the city has enjoyed "a clean bill of health" in its financial audit reports, Francisco said.

Thanks to a voter approved amendment to the city's charter, the city will be allowed to hire an auditor for forensic audits rather than contracting with a firm to investigate smaller claims.

"The recent City Charter change authorizing the employment of an internal City Auditor function will enable the City Council to employ in-house staff to perform such forensic audits on an ongoing basis, rather than employing third-party auditors or consultants to perform related forensic engagements," Francisco said. "The city has separately engaged auditors (BKD/Forvis and others) to perform such limited audit engagements for many years, related to suspected fraudulent activities, management efficiencies, perceived control weaknesses, and other areas."

Mindy Wood covers City Hall news and notable court cases for The Transcript. Reach her at mwood@normantranscript.com or 405-416-4420.