UPDATED: State Auditor releases two more audits of Whitley Sheriff’s Dept.; finds another $92,000 missing, total deficit is now $216,000

Read the entire audit of the 2007 tax settlement by clicking here.

Read the entire audit of the Sheriff’s Dept. for 2008 by clicking here.

Read all previous Sheriff’s audits by clicking here.

For the second time in less than nine months, State Auditor Crit Luallen has issued a scathing audit of Whitley County Sheriff Lawrence Hodge’s books, and has again referred findings to the FBI for further investigation.

Thursday morning, Luallen released two audits – the 2008 fee account and 2007 tax account – which found a total deficit of more than $92,000 in office accounts.

Combined with a nearly $125,000 deficit found in five prior audits – the 2005 and 2006 tax account audits and the 2005-2007 fee account audits that were released in June – the overall total deficit is $216,498.

Auditors noted that the numbers could be higher because of poor record keeping and recommended that Hodge repay all the money from his personal funds.

The new audits also reportedly found instances where nearly $1 million in property tax bills received early payment discounts when they were not entitled to do so, including the sheriff’s personal property tax bill, and other instances where people paid more in taxes than they should have.

The two most recent audits cover much the same ground as the other five audits with similar findings.

Hodge noted that the two audits released to the public Thursday were conducted at the same time as the five audits, which were released in June.

"Everything that was wrong on the first audits is a mirror of what you see right there. There is nothing different," Hodge said. "I’m not the bookkeeper. I’ve never kept the books.

"I don’t claim to know how to keep the books that’s why in this sheriff’s office you have a bookkeeper, who is certified by the state. They should have turned this loose when they turned the others loose."

Hodge provided no official response to the state auditor’s office on either of the two most recent audits that were released Thursday.

Hodge said that to his knowledge the two audits, which were released Thursday, hadn’t been closed with an exit conference, which has been done in the case of past audits. He said this was the reason he had no official response.

"On the first one, we had an exit conference. I drove to Frankfort and we had an exit conference. They never set up a time for me to come," Hodge said. "My reply would have been the same as the first one. We fixed everything they requested of us."

He said the changes won’t show up until the audits are done for 2009.

Audit reports on the 2005-2006 tax accounts and fee accounts for the years 2005-2007 weren’t completed until March 31, 2009.

Audit overview

In compliance with state law, the auditor annually issues two sheriff’s reports – one reporting on the audit of the sheriff’s tax account and the other reporting on the audit of the fee account used to operate the office, according to a press release from the state auditor’s office.

The 2008 fee account, which is used to operate the sheriff’s office day-to-day functions, had a deficit of $4,426. It includes the calendar year 2008.

Since the sheriff used the 2007 fee bank account for the 2008 fee receipts, this led to a known cumulative deficit of $15,054, which includes the $4,426, along with $10,628 used from the 2007 fee account.

Undeposited receipts of $2,093 and disallowed expenditures of $2,333 resulted in the known deficit of $4,426 in the sheriff’s 2008 official fee account, the audit noted.

Disallowed expenditures included: $751 in finance charges and late payment charges, $1,034 in overdraft charges, $513 in IRS penalties and $35 in dues paid for a former employee, according to the audit.

The audit recommends the sheriff deposit personal funds to cover deficit.

The tax account, which is used to house taxes collected from the public and corporations before they are distributed to local taxing districts like schools, had a deficit of $87,589.

The audit recommends the sheriff deposit personal funds to cover the deficit.

The tax account audit covers a period from Aug. 1, 2007 through July 25, 2008, when the sheriff closed out the 2007 property tax collections and turned the uncollected bills over to the county clerk’s office as required by law.

Auditors found that the total cumulative deficit in these two accounts was $92,015.

The fee account deficit is due to undeposited receipts, disallowed expenditures and money used from a prior year. The tax account deficit is due to undeposited receipts that the office received as tax payments from Whitley County taxpayers and corporations.

Auditors were unable to determine the complete amount of the tax account deficit because of poor and incomplete recordkeeping of taxes collected by the office.

Auditors found that the problems occurred in each account because of a lack of internal control to prevent or detect these types of errors and because the sheriff did not implement any type of oversight.

The audits found that a lack of adequate segregation of duties exists over all accounting functions, which is a frequent audit finding in reviews of small government departments or offices with few employees.

During a review of internal controls, auditors noted that the sheriff’s former bookkeeper was responsible for opening mail, receiving and recording cash, preparing daily checkout sheets and making daily bank deposits, writing disbursement checks, posting to the receipts and disbursements ledgers and tax collection journals, reconciling bank records to ledgers and journals, and preparing monthly financial reports.

"It is imperative that proper reporting is maintained by the sheriff’s department," Luallen said. "When receipts go undeposited and reports are inaccurate, this directly affects the local taxing districts and vital services suffer. Taxpayers expect their tax dollars to be properly handled and reported."

Tax account audit

In the tax account, auditors found that the sheriff did not make deposits in a timely manner or maintain proper documentation for waiving penalties; allowed discounts on tax bills to be paid after the discount period and created multiple supplemental reports throughout the tax collection period.

Because auditors found an unusually large number of supplemental tax reports prepared by the sheriff’s office and a large volume of paid tax bills reported on them, they expanded their testing of these reports by obtaining bank deposits that provided copies of the taxpayers’ canceled checks and the cash amounts that made up the deposits. Auditors then randomly compared copies of the taxpayers canceled checks to the sheriff’s daily tax collection journals used to prepare the supplemental reports and copies of the paid tax bills on file at the Whitley County Clerk’s Office.

From their sampling, auditors found:

• Eight taxpayers’ checks for 14 tax bills totaling $3,600 more than the amounts marked as paid on the tax bills and reported by the sheriff’s office.

• Three of these 14 bills were marked as if they were paid during the face period and were reported to the taxing districts at the face period amounts. However, the sheriff’s office received payment at the five percent penalty amount.

• The remaining 11 bills were marked as if they were paid during the five-percent penalty period and were reported to the taxing districts at the five-percent penalty period amount. However, the sheriff’s office received payment at the 21-percent penalty period amount.

According to the audit, supplemental reports can be used to conceal the theft of tax payments to the sheriff’s office or taxpayers are not charged penalties and interest owed, which ultimately results in taxing districts receiving less than they otherwise would.

"The supplemental tax reports should not be prepared to report a paid tax bill as if it were paid in a previous month, which ultimately results in correct amounts not being reported and paid to the taxing districts," according to the audit.

Four of the supplemental reports for regular taxes totaling $992,749 were used to report tax bills as collected at the discount rate after the discount period had ended.

The audit recommends the sheriff implement controls over the office’s tax collection process and provide appropriate oversight.
Auditors also found the sheriff’s personal tax bills were marked paid on Dec. 20, 2007 at the discount period amount; however, payment for these bills was not deposited until Feb. 15, 2008.

These bills were not reported to the taxing districts until March 2008 when they were included on a supplemental report, according to the audit.

Hodge said that all requests for tax penalty waivers are now sent to Frankfort.

Hodge said that penalties were often waived or discounts extended on property tax bills due to problems in recent years with tax bills being sent out.

For instance, in January 2005, Hodge said over 4,000 property tax bills have been returned to his office because of insufficient addresses out of the nearly 6,300 remaining unpaid bills.

In November 2008, 1,120 tax bills were inadvertently mailed to the wrong address due to another printing problem. While the sheriff mails and collects tax bills, he doesn’t print them.

"If you come in here and say that you didn’t get your tax bill, I’m not going to call you a liar because we have had major problems getting these tax bills out," Hodge said.

"How do you look at somebody and say, ‘Hey, they are lying just to get a break.’ We gave everybody a break. We never turned anybody down."

Hodge said that his office staff even extended that to him even though he technically shouldn’t have gotten a discount because he paid the bill late.

"I didn’t ask them to. They were just taking care of me, but that has been fixed too," he said.

"We don’t give anybody discounts any more. They have to go through Frankfort," noted Kendra McKiddy, Hodge’s head bookkeeper.

Seized assets

Findings in the 2008 fee account include an auditor’s recommendation that the sheriff should not expend seized assets before being forfeited by the court.

According to the audit, on Feb. 8, 2008, the sheriff seized $538 in cash in a drug-related arrest and these funds were deposited to the sheriff’s drug and alcohol account. This case was dismissed on May 2, 2008, and the confiscated funds had to be returned to the defendant.

However, at that time, there were not sufficient funds in the sheriff’s drug and alcohol account to make the refund because the sheriff had expended the confiscated funds even though the case had not been adjudicated, and these funds had not been forfeited to the sheriff’s office.

On June 25, 2008 the sheriff purchased a $538 money order from personal funds in order to refund the defendant’s seized funds, according to the audit.

Auditors noted that the situation with seized assets was allowed to occur due to a lack of controls over record keeping in the sheriff’s office and lack of any oversight by the sheriff, according to the audit.

The audit recommends the sheriff comply with Kentucky law by segregating all seized assets and ensuring they remain on deposit until forfeited by the court to the sheriff’s department.

The audit also found that the sheriff did not maintain proper documentation for receipts and disbursements of the drug and alcohol account. This finding occurred in previous audits of the sheriff’s office.

Hodge said that auditors are mistaken thinking that he deposited his personal funds to buy a money order to repay money.

He said one defendant had some cash in his belongings, and that the office obtained a money order in order to refund the money to him so that they would be a paper trail of it.

Hodge said emphatically that he would not have taken the money out of his personal funds for that purpose.

"They’d have to lock me up before I gave them a nickel," he added.

Hodge said he thought he had the drug fund set up properly.

Other drug account findings

The drug fund started 2008 with a balance of $8,938 and ended the year with a book balance of $346. During the year, the office expended about $14,000.

During 2008, the sheriff did not maintain adequate documentation for receipts and expenditures from the drug account from the drug account, the audit found.

"Although the sheriff maintained a handwritten log explaining the purposes of the drug account expenditures, no signed documentation was maintained to show that the checks cashed were actually given to the informants," auditors wrote.

"In addition, the sheriff’s handwritten log did not include explanations for $700 made payable to the sheriff in two separate checks."

Because Hodge did not maintain minimum documentation as adopted by the Kentucky Sheriff’s Association, the office disallowed $700 in undocumented drug and alcohol account disbursements.

Hodge said he’s not sure what $700 auditors are talking about.

Auditors recommended that Hodge deposit $162 in personal funds into his drug and alcohol account to make up the difference. $538 had already been refunded from his personal funds.

In addition, auditors recommended that Hodge invest monies seized and forfeited into an interest bearing bank account as required by state law.

Tax forms for informants

Auditors also found that during 2008, Hodge paid six informants between $1,300 to $2,200 each, but did not issue a Form 1099 to those individuals as per federal regulations for people paid more that $600 during a calendar year.

Hodge said that he will not be issuing financial statements to informants out of concern for their safety.

"Guilty. I’m not going to," he said. "Whatever it takes, I’m not going to give them no tax form. I’m not going to put their name on anything," he said.

Poor record keeping

The audits noted numerous instances of poor record keeping with money deposited in wrong accounts or not posted to the correct ledger.

$29,600 of calendar year 2008 fee receipts were deposited to the 2007 tax account.

$15,052 in receipts were posted to the receipts ledger but deposited in the 2007 tax account.

$1,034 in overdraft fees were not posted to the sheriff’s disbursements ledger.

$30,785 of receipts for serving papers were deposited to the 2008 fee account, but were not posted to the receipts ledger.

$11,603 in employee wages were posted to office supplies and materials, which caused the money not to be reported on the employees’ W-2 forms and $888 of the employer share of Social Security taxes not to be paid.

A school commission deposit totaling $52,141 was corrected twice resulting in that amount being due from the 2007 tax account to the 2008 fee account.

"Lack of any controls over the operations of the office and a lack of poor oversight by the sheriff resulted in numerous errors noted on the financial records," auditors wrote.

"We recommend the sheriff immediately implement controls and oversight over his office to assure errors of this magnitude are prevented in a timely manner and maintain accurate financial records in the future."

Hodge said that part of problem his office had with crediting things to the wrong account revolved around the fact that everything used to be done by hand.

"Everything was done by hand ledger until the state set these computers in here. Now, it does it itself," he said.

Hodge said that he can see how his office staff would have made mistakes, especially at tax collection time when they may have been working 12 or 13 hours a day. He noted they did this voluntarily and didn’t get paid overtime for it.

"I can see them making a technical error, but it is a far cry from backing money up to just stealing," he said.

McKiddy said that the office didn’t get the new computers until 2008.

She said that in addition to computer records for tax collections, office staff are also still using some hand ledgers.

"Now we are doing it by hand and on computer," she said. "We still have our hard ledgers to double check and make sure everything matches up."

Excess fees

On March 17, 2009, Hodge presented his annual financial statement to the fiscal court for approval. Excess fees per that statement were less than $1, but based on the available records, $46,061 in known excess fees are due to the fiscal court for calendar year $2008, according to the audit.

"Auditors are unable to determine the precise amount because of the lack of adequate recordkeeping in the sheriff’s office. Had adequate records been available, excess fees may have changed and possibly increased," auditors wrote.

Earlier this month when Hodge presented his annual financial statement to the fiscal court, he also presented a check for partial payment of excess fees totaling $40,624.

"We owe the fiscal court nothing," Hodge said about any past amounts. "We absolutely owe nobody anything. How many minutes of air do you think I would take as a free man if they thought that I had stole something with me running against the state police in the election?"

"How many seconds do you think I would remain free? I’d be in jail so fast my head would spin."

One of Hodge’s opponents in the upcoming sheriff’s election in May is retired Kentucky State Police Detective Colan Harrell.

Hodge said that he requested either the FBI or the Attorney General’s Office conduct the investigation of his audits because of potential conflicts that the state police might have investigating the case.

"If there is something wrong, I want to know about it," Hodge said. "I didn’t feel like I could get a fair hand by the state police."

So far the FBI has released no public report regarding its investigation into findings on the prior five audits that were made public in June.

Corrective action recommended

As of Aug. 26, 2009, Hodge had not taken corrective action for the prior year findings.

The audit recommended Hodge deposit $10,628 to eliminate the deficit from his 2007 fee account and to pay the fiscal court $134,428 for excess fees.

"Additionally, auditors recommend the sheriff deposit personal funds of $3,240 for disallowed drug fund expenditures and recommended the sheriff pay $5,407 to the Office of the Attorney General for the county attorney’s portion of the sale of forfeited assets," auditors wrote. "We recommend the sheriff take corrective action for prior year findings."

Fuel purchases

Although Hodge required deputies to retain the original invoices for fuel purchases, auditors found for the month tested, which was December 2008, that there were 42 unsubstantiated fuel charges totaling $1,025.

"These fuel purchases were made by seven deputies and the sheriff," auditors wrote. "The sheriff’s office provided auditors with a copy of a detailed statement from which payment was made. We recommend original invoices be retained for all fuel purchases and that these invoices be compared to monthly statements before payment is made."

One question answered

The audits released Thursday do seem to answer one question generated by the previous round of audits, and seem to account for what happened to more than $10,000 deficit in a prior audit.

The audit of the 2007 fee account, which was made public in June, showed that it had a deficit of $10,628.

The audit of the 2008 fee account, which was released Thursday, notes that it used $10,628 from the 2007 fee account.

Other fee account findings include:

• The sheriff should maintain accurate accounting records and account for all receipts in the appropriate year.

• The sheriff lacked controls over deposits and did not provide adequate oversight.

• The sheriff did not deposit receipts of the office in a timely manner.

• The sheriff should adequately document payroll expenditures.

• The sheriff should submit an amended report of employee wages to the appropriate authorities.

• The sheriff did not take corrective action for prior year findings.

A complete copy of each audit can be viewed at www.auditor.ky.gov or on the News Journal’s website at www.thenewsjournal.net.