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Audit: KACO had “self-serving” culture that allowed more than $3 million in questionable expenses

October 29, 2009

The state auditor’s office found more than $3 million in questionable expenses over a three-year period after sifting through the books at the Kentucky Association of Counties.

The audit released today documents $219,145 in restaurant purchases, each of which topped $1,000, $43,000 on alcohol and $48,426 on Christmas dinners for the KACo board, according to a release from Auditor Crit Luallen‘s office.

Auditors provided highlights of expenses along with the complete examination.

Here’s the complete release –

State Auditor Crit Luallen today released a special examination of the Kentucky Association of Counties (KACo), which found a “self-serving” culture that resulted in more than $3 million in excessive or questionable spending over a three-year period.

As KACo’s revenues increased 75 percent from 2003-2008 taking the annual budget to more than $5.7 million, the level of discretionary spending by the organization also increased instead of KACo maximizing benefits to the counties it serves.

This culture flourished as many board members, management and staff spent funds on lavish dinners, alcohol, sports and entertainment tickets, staff birthday meals and extravagant Christmas parties.

The exam found nearly $2 million charged on agency credit cards over a three-year period, with $1.4 million having inadequate or no supporting documentation, an unclear business purpose or was excessive in nature.

The lack of board oversight included weak internal controls, minimal conflicts of interest and ethics policies, and no whistleblower policy.

The exam reviews KACo’s finances from July 1, 2006 through June 30, 2009 and makes 40 findings. Most importantly, the exam details more than 150 recommendations to improve board oversight and management operations at KACo.

“Our examination provides the leadership of KACo the proper tools to continue to strengthen accountability and to fulfill its responsibilities to the counties and the taxpayers,” Luallen said. “I believe the public expects no less. In this current economic downturn, when our counties are struggling, our citizens have no patience for waste and excess from those who hold their trust and handle their tax dollars.”

Luallen’s office announced its plans to audit KACo and the Kentucky League of Cities (KLC) in July after alarming media reports, allegations received by the Auditor’s Office and serious concerns over spending at both agencies. The KLC audit will be released in the coming weeks.

KACo, a public, non-profit association primarily funded by public dollars and governed by county officials, offers lobbying and financing services and sells competitively-priced insurance to member counties, who pay insurance premiums and membership dues.

The majority of KACo’s revenue comes from fees paid by the insurance and financial programs administered by KACo staff. The insurance portion of the organization is regulated and audited by the Kentucky Department of Insurance.

In comparison, the county membership dues are not a large source of income for KACo, having averaged around $130,000 each year since 2003.

Luallen said the KACo should have found ways to return increases in revenues to its member counties as lower membership dues and insurance premiums or as additional training programs instead of on wasteful spending.

If true reform is to occur, Luallen said, the leadership of KACo must consistently demonstrate “a change in its attitude and culture.”

She said the KACo board has taken numerous steps recently as a result of public scrutiny and media reports to begin to achieve greater accountability.

Additionally, she said that there were board members and employees of KACo who resisted excesses evidenced in the exam and who worked effectively, despite the culture that developed.

In its response to the exam, the KACo board indicates a commitment toward moving forward with reforms.

The KACo exam reviews the organization’s policies and procedures, as well as the financial activities of the former executive director and his key management team – the deputy executive director/unemployment insurance director, general counsel/chief financial officer, director of insurance and the director of financial services.

The exam also reviews the spending records of one current and three past board presidents active during the examination period and summarizes the results for all remaining staff members.

Auditors questioned $3,026,931 in expenditures for the three-year exam period. Of this, a total of $1,448,578 included questionable credit card and reimbursement expenditures.

When reviewing credit card expenditures, auditors found KACo paid $219,144 for 77 restaurant charges that each cost more than $1,000. Examples include: an $8,857 meal at Mike Dikta’s Restaurant in Chicago; an $8,161 meal at Z’s Oyster Bar and Steakhouse in Louisville; a $7,237 meal at Sal’s Italian Chophouse in Lexington; and a $7,082 meal at Starker’s Restaurant in Kansas City.

Inadequate documentation made it impossible to determine the attendees or business purpose for the meals. The exam recommends that the board develop a policy to require specific documentation accompany restaurant charges so that a review can ensure whether the expenditure was appropriate and reasonable for the operations of KACo.

In 2007 and 2008, the organization spent $48,426 for two board Christmas parties for management, staff and board members. After brief board meetings that were held during the day, these individuals, along with their guests, were driven to Spindletop Hall in Lexington by a tour bus to attend the Christmas parties each year.

Additionally, the exam documents that KACo spent $43,000 on alcohol, although auditors believe the amount is significantly higher based on information provided through staff interviews. Auditors were unable to complete an accurate analysis of alcohol purchases because credit card and business expense reimbursement transactions either had no supporting documentation or lacked detailed receipts.

The organization also spent $28,700 in entertainment ticket purchases, including university football and basketball game tickets, and Kentucky Derby tickets, along with other entertainment venues.

Auditors found a $1,814 credit card charge for 13 tickets to the Radio City Christmas Spectacular in 2008. The tickets were for entertainment for five board members, along with spouses and companions, during a bond closing in New York City.

“These ticket purchases by KACo appear to be purely for entertainment purposes and provided no benefit to KACo, its membership, and the counties and the taxpayers they ultimately serve,” according to the exam.

The exam also found that the organization spent $11,593 on staff birthday lunches, $7,262 on staff Christmas gifts, $3,053 on other board and staff gifts, $8,119 on air travel insurance, $2,385 on conference meals and $890 on adult entertainment.

The adult entertainment charges include escort services on two occasions and four charges at two different strip clubs. These were charged to KACo credit cards of the former executive director and former board president.

Besides the $1.4 million in credit card expenses, auditors also found numerous other instances of questionable expenditures by KACo.

According to the exam, KACo offers two retirement benefits for its employees: one in the County Employee Retirement System (CERS) and a 6-percent match in the Kentucky Public Employee Deferred Compensation Authority. Over a three-year period, KACo paid $622,355 for the employee 6-percent retirement match.

Additionally, auditors found that KACo spent $334,300 to pay board members for meetings, $278,154 for legal defense for convicted officials, $247,944 for a sports advertising contract, $83,000 for donations and sponsorships, and $12,600 for use of two condominiums.

Auditors found KACo rented two condominiums: One used by the organization’s product development manager in Frankfort at a cost of $11,000 over a 10-month period and another Frankfort condominium for its former executive director for $1,600 for a two-month period.

The exam recommends the board adopt stringent policies regarding spending in these categories. The list of expenditures can be viewed at http://www.auditor.ky.gov.

According to the exam, the board did not establish comprehensive policies that would clearly define the types of allowable expenses by both staff and board members for business purposes.

The board also allowed the former executive director to have “unchecked spending authority” and did not have sufficient detailed understanding of its annual budget and received no formal orientation.

“By all accounts, KACo has provided quality services and savings to the counties through its programs; however, the organization’s mission statement only focuses on the provision of services to counties and does not address providing these services in an efficient manner to maximize the benefit and return to the counties,” according to the exam.

The exam recommends the board refocus its mission with an emphasis on operating for the greatest benefit to member counties and in a manner that demonstrates a responsibility in keeping with public expectations.

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One Comment
  1. January 12, 2010 4:10 am

    A whistleblower is a person who raises a concern about wrong doing occurring in an organization or body of people
    http://blowerwhistle.com
    http://a-whistle-blower-policy.blogspot.com/

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