DENVER – The city is not clearly reporting the amount of money passing through the Denver Public Trustee’s office, and the Denver Public Trustee’s accounting, check-handling and foreclosure recordkeeping were among practices that need improvement, a new audit from Denver Auditor Timothy M. O’Brien, CPA, shows.
“The Denver Public Trustee needs an organized and transparent approach to handling funds,” Auditor O’Brien said of the audit released this month. “Accountability and accuracy are key to serving the public responsibly.”
The Denver Public Trustee, an agency located in the Clerk and Recorder’s Office, oversees foreclosures in Denver and handles foreclosure funds. The Clerk and Recorder’s office requested this audit of the Denver Public Trustee as a proactive measure.
Our audit of the office found that additions and deductions for agency funds were understated in the city’s Comprehensive Annual Financial Report because the public trustee used numbers that were net of additions and deductions, instead of gross amounts, meaning the actual amount of money flowing through the office was significantly higher than what was reported.
For example, for the agency’s balance reported on Jan. 1, 2017, additions and deductions to assets were recorded as $3 million and $3.6 million, respectively, while in fact these numbers were off by $20.7 million. Meanwhile, additions and deductions to liabilities for the same period, $170,000 and $784,000, respectively, were off by $23.6 million.
Though these understatements did not impact the ending balances, the incomplete reporting means the agency isn’t reflecting the true amount of money flowing through the office. The scale of the office’s operations is minimized with the net reporting method and it obscures the impact of the office on the city’s operations. This is especially important when working with a third party’s money.
Separately, the combined weaknesses in internal controls we identified create a risk of misappropriation or loss of funds — funds the public trustee manages on behalf of others.
Among internal control deficiencies, the auditors found the Denver Public Trustee needs to improve how it handles checks and how it divides job duties. And the agency needs to get proper accounting software.
When we began our audit, the Denver Public Trustee’s practice was to print and hold checks owed to former property owners. This happens when a foreclosed property sells at auction or the outstanding debts are otherwise satisfied, and excess funds remain that are owed to the former property owner. However, holding onto a preprinted check creates a risk of fraud. While we did not find evidence of misappropriation happening, the audit found it would be more secure for the Controller’s Office to write checks as needed, not in advance.
We also observed that held checks are not properly accounted for at the end of the year. Currently they are treated the same as outstanding checks. Outstanding checks are checks that have been sent but have not yet been cashed. However, held checks have not been sent to the payee, and these monies are still under the control of the Public Trustee.
The Denver Public Trustee could also work to lower the risk of misappropriation of funds by having a better segregation of duties for performing almost all critical financial processes. One employee can create check requests, approve check requests, print checks, and create and submit the positive pay file to a bank. The same employee can also approve or reject positive pay exceptions and reconcile the bank accounts. Positive pay files are meant to act as another safeguard against fraud. When using positive pay, an agency can report to the bank what checks are expected to be cashed, and if any details don’t match when the check is cashed, the bank would stop processing the check.
We found that the Denver Public Trustee needs to review current duties assigned to staff and identify incompatible job responsibilities.
“The same person should not be responsible for almost every step in the process for writing checks and reconciling bank information,” Auditor O’Brien said. “While the Denver Public Trustee might have limited staff resources, protecting against fraud should be a high priority when making staffing and budgetary decisions.”
In addition, the Denver Public Trustee lacks an adequate accounting system for financial reporting. Its current system is a foreclosure management system and requires significant manual intervention to process transactions. The agency also needs to ensure employees receive appropriate levels of access to information systems to protect critical information.
The audit team also recommended removing outdated fees from the system, so the public would not be accidentally charged an incorrect amount. The Denver Public Trustee has already made this change and said it will work to set up a process to regularly review fees in the system. The agency agreed to all audit recommendations and stated that it is working with the Controller’s Office to improve several accounting processes.
Finally, the audit team did confirm the agency approves payrolls accurately and promptly. These approvals show the agency is following city rules to ensure employees are paid correctly and on time.