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December 4, 2005Accountants missed many red flags, officials sayTRAVERSE CITY - East Bay Township's financial practices were so tangled and cryptic that a newly elected board dumped its longtime auditor in favor of Plante & Moran, whose "forensic audit" eventually uncovered alleged embezzlement by the township clerk.The former auditors, Dennis, Gartland, & Niergarth, charged the township $125,000 since 1999 and routinely gave East Bay finances a clean bill of health. But when Plante & Moran waded into township finances early this year, the findings caused them to suspect embezzlement. Its general audit discovered East Bay's books were in such poor shape it could not give an opinion on the validity of the township's financial status and disclaimed the audit. Follow-up audits indicated Clerk Janice Gee embezzled $62,000 since 1995. Question is: Why? Discrepancies between the firms' audits didn't escape East Bay Supervisor Glen Lile. "My question is, why was nothing found until the new auditor came in?" he said. East Bay's board of trustees has asked its attorneys to investigate filing a lawsuit for malpractice against Dennis, Gartland & Niergarth, a local firm. Robert Thompson, director of auditing and accounting for Niergarth, said company officials can't talk about East Bay's problems. "Our code of professional ethics does not allow us to discuss client matters with a third party," Thompson said. In mid-June, authorities charged Gee with multiple felony embezzlement counts. She's awaiting trial on 14 felonies for alleged thefts of township funds. About a week before Gee was charged, Dennis, Gartland & Niergarth was the featured speaker at a Traverse City Area Chamber of Commerce seminar. Its topic: How to detect fraud and embezzlement. Audit disclaimed An expert in accounting and fraud detection said amounts around the level detected in East Bay would likely fall under the radar of just about any general audit. What's unique, however, is that Plante & Moran took the step of disclaiming the audit, said Brian Green, of the University of Michigan Dearborn School of Management. "Well less than one-half of one-percent of audits get an adverse opinion or are disclaimed," Green said. East Bay officials said they understand how the embezzlement could be missed. What they don't understand is how year after year Niergarth let weaknesses in the township's internal controls and other signs slide without correction. "In the last two years township officials spent, like, $400,000 of the fund balance," Lile said. "Shouldn't the auditors be alarmed? Shouldn't they bring that to the attention of the board?" Disparities obvious A review of audits going back to 1999 shows each year the township received a similar letter from Niergarth that stated: "We noted no matters involving the internal control over financial reporting and its operation that we consider to be material (major) weaknesses." Township trustee Beth Friend said disparities between Niergarth and Plante & Moran are obvious when their letters are compared. "What is really their fault and what constitutes malpractice will have to be determined by an accountant and the courts," Friend said, "but I see a disparity that makes me uncomfortable." Plante & Moran cited a lack of internal controls coupled with its inability to get the general ledger to balance as red flags that led to recommending a special forensic audit to detect embezzlement. Plante & Moran reported five major weaknesses in the township's internal controls, including the failure of the township clerk and township treasurer to reconcile their books. "In essence, those two offices are the main and sometimes only check on the financial operation of townships," Green said. 2002 state probe The Michigan Department of Treasury in 2002 investigated township finances and requested copies of management letters for 1999, 2000 and 2001. Treasury officials discovered Niergarth was not providing a management letter to the township. Management letters document deficiencies in the internal controls. "We had met with the township board following our submission of the 2000 and 1999 audit report(s) and rather than issuing a letter, we discussed the matter verbally at their meeting," wrote Mary Krantz, a partner at Niergarth, in her response to the state. "I can't believe they wouldn't put it in writing. That's just not good auditing," said Dean Bott, a CPA, and Grand Traverse County's finance director. The state also discovered Gee wasn't submitting all bills - including credit card statements with questionable charges - to the township board for approval. Treasury noted in its 2002 letter to the township that state law requires the township board to approve all bills. But the practice continued without correction, unreported to the state until Plante & Moran audited the 2004 books. "I hate to say it, but it just sounds like (Niergarth) let them down," Bott said. Green said it's important for townships to change auditors every five years. "If you audit the finance statements for 10 or 20 years you get friendly," Green said. "When you get too comfortable with your client, you are susceptible to the halo effect. "Other people embezzle, other people's congressmen are crooks, but not my congressman, not my client," he said. See Related Stories: Other townships pondering changes - December 4, 2005 Bartko hears felony counts - November 29, 2005 Two more face charges in financial scandal - November 23, 2005 News Break: Ex-supervisor, current treasurer charged - November 22, 2005 Records show township paid planner from U.P. - November 13, 2005 Signature goal reached for recalls - November 9, 2005 East Bay Township probe widens - October 27, 2005 Bid for state's assistance in removing Gee falls short - October 12, 2005 East Bay recall petition drive thriving - October 11, 2005 Gee trial delayed as prosecution continues to build case - October 1, 2005 Audit: East Bay Township clerk took $62K - September 28, 2005 Residents demand answers from East Bay board - September 16, 2005 Audit may result in more charges - September 14, 2005 East Bay residents to circulate petitions - September 3, 2005 East Bay finances: 'Little stuff' totals thousands - August 28, 2005 Prosecutor says East Bay probe may widen - August 26, 2005 Former supervisor likely purchased personal items - August 21, 2005 East Bay Township clerk is back to work - August 21, 2005 More money may be missing in East Bay - August 16, 2005 Lile suggests shutting down East Bay government - July 22, 2005 East Bay Township supervisor expects 'real ugly' meeting - July 22, 2005 East Bay assessor to be paid as fate is determined - July 12, 2005 Errors pile up in review of East Bay records - July 10, 2005 Public backs East Bay probe leading to arrest of clerk - June 28, 2005 East Bay Township clerk charged with embezzlement - June 23, 2005 Township officials pushed for audit leading to Gee's arrest - June 23, 2005
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