EXTRA CONTENT: Audit finds nearly $125,000 deficit in Whitley Sheriff’s office over three year period

To view all five audits of the Whitley County Sheriff’s Office click here.

State audits of Whitley County Sheriff Lawrence Hodge’s books, which were released Tuesday morning, showed a total deficit of nearly $125,000 in the office over a three-year period.

State Auditor Crit Luallen noted that the figure could be more than that due to poor recording in the sheriff’s office and that she has referred the findings to the FBI for further review.

"Our audits found serious problems of financial management and the recommendations should improve oversight of the office," Luallen said in a press release. "Additionally, our referral to the FBI will insure that law enforcement conducts any necessary follow-up." 

The audit also reportedly found instances where millions of dollars in property tax bills received early payment discounts when they might not have been entitled to do so, and other instances where people paid more in taxes than they should have.
Terry Sebastian, Director of Communications for the Auditor’s Office, said Hodge would be asked to make up the deficit.

"Any time there is a deficit in a public officials account, we always ask the public official to write a check or make a deposit into that account to reimburse it," Sebastian said.

The FBI has been asked to further investigate the case to see what happened to the money, Sebastian said.

In some cases it was deposited in the wrong account or was disallowed expenditures, but auditors had difficulty accessing some records, which means the deficit could be larger, he said.

Whether any criminal charges will arise from the audit findings will be a determination left up to the FBI.

"We aren’t a law enforcement agency. Our job is to go in and annually audit the books on the sheriffs, fiscal courts and clerks," Sebastian said.

"Any time we find problems, we always refer it to the attorney general or FBI. They are law enforcement and they will look at the books and see if it needs to be taken further."

Hodge responds

Hodge said that there was no intentional wrongdoing by anyone in his office.

"That money was used running this office. It didn’t walk out of here. It wasn’t put in the right place to suit the auditors," he said. "I think it is all just technical errors and that is what will come out through an investigation," Hodge added that he’s not worried about the FBI investigating the matter.

Hodge said that when he first met with state auditors about problems they found, he requested that the matter be investigated by anyone besides the Kentucky State Police because of what he describes as "political reasons."

A Kentucky State Police officer reportedly plans to run against Hodge during next year’s election.

Hodge said that he won’t repay anything until the FBI or another agency gets done with its investigation. Then, if he owes money, he said he would be glad to repay it.

Hodge said he thinks next year’s election has something to do with the timing of the audit’s release.

"There is not a doubt in my mind. They have been doing these audits for three or four years. Why wait until now?" he said.

2005-2007 audits

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 office.

The five audits released Tuesday by Luallen’s office cover the sheriff’s 2005 and 2006 tax accounts and his fee accounts for the years 2005-2007. The five audits cover a span from Jan. 1, 2005 until Dec. 31, 2007.

Auditors had a difficult time accessing records in the sheriff’s office throughout the audit process, which caused the delay in releasing the sheriff’s audits, the press release notes.

The combined known deficit found in the office reported in the five audits is $124,483.

The 2005 tax account had a deficit of $15,984 and the 2006 tax account had a deficit of $54,444. According to auditors, "the sheriff’s office failed to deposit receipts paid by individuals and corporations for property and other taxes into the official tax account, resulting in the deficits." 

The sheriff’s fee accounts ran deficits of $2,803, $40,624 and $10,628 from 2005-2007, respectively. According to auditors, these deficits occurred from unknown undeposited receipts and disallowed office expenditures.

"Auditors were unable to determine the complete amount because of a lack of adequate record keeping in the sheriff’s office. Had adequate records been available, the deficit would likely be more," according to the audit.

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.

All 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.

Fee account findings

Audit findings in the fee accounts include:

• The sheriff did not maintain accurate accounting records or account for all receipts in the appropriate year.

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

• The sheriff should not loan money to his fee account from his tax account. The audit did allow for advances in some cases.

• The sheriff did not provide adequate oversight for fuel purchases made with credit cards.

• The sheriff lacked adequate controls over drug and alcohol account receipts and their disbursements, and did not maintain proper documentation for disbursements of the accounts.

• The sheriff should not expend seized assets before the court awards the assets.

Hodge said his department had one instance where they arrested a man on drug charges, who was also facing a federal court sentence. A deal with the suspect’s attorney agreeing to forfeit some of the assets seized as part of a plea deal.

Hodge said those funds were deposited in the bank as forfeited funds prior to a judge’s formal order.

Tax account findings

Audit findings in the tax accounts include:

• The sheriff’s office did not properly account for and distribute all tax payments received from taxpayers.

• The sheriff should accurately account for all franchise tax collections and distribute all franchise taxes properly.

• The sheriff’s office did not properly account for all paid and unpaid tax bills and accepted payments after the tax sale date.

• The sheriff should refund penalties collected in error.

• The sheriff did not deposit receipts of the office in a timely manner and did not reconcile deposits to the daily collection journals or a daily receipts ledger.

In the tax account audits, auditors found an unusually large number of supplemental reports prepared by the sheriff’s office and a large volume of paid tax bills reported on them.

A supplemental report is generally used to report discounts given on property tax bills after the discount period has closed.
Kentucky law provides very specific guidelines as to when a discount can be given after the discount period.
The Whitley County Sheriff’s office reportedly discounted millions of dollars of tax bills through the supplemental reports, according to the audits.

Auditors found evidence that in some instances taxpayers paid a higher amount than was reported. In other cases, taxpayers were not charged the appropriate amount of penalty and interest that was due, which resulted in taxing districts receiving less than they should.

The tax audits also found that the sheriff lacked controls over the tax collection process in his office and did not provide any oversight in this area. "When tax bills are paid but not subsequently marked as paid by the sheriff’s office, it can be a mechanism for concealment of theft of tax collections," according to the audit. 

Because the sheriff did not reconcile the daily tax collection journals to the deposits, available records are insufficient to determine if all collections were deposited in tact or made in a timely manner, the audit found.

Hodge said that he’s not sure what happened in terms of the payment amounts on the tax bills when the money was collected in regards to early payment discounts and late fees.

Hodge said that during the years that the audit was conducted, his office handled about $25 million most of which through hand ledgers.

"We had no software. These girls do everything by hand. They are all local and honest as the day is long. I don’t think they will find any fraud or anything like that just technical stuff," Hodge said.

"We do the best we can with what we’ve got."

Hodge said that it was only last year that his office got a computer system to collect taxes with.

"We used to have to do it by hand and pull it by hand," he said. "A .001 percent technical error rate is not too bad for that long a period when you do everything by hand."

Hodge said that during the audit process, state auditors presented his office with a form that they are supposed fill out when the penalty is taken off a tax bill.

"We had never laid eyes on that form before," Hodge said.

He said that Kendra McKiddy, his new head bookkeeper, has met with state auditors and is complying with their recommendations in terms of making deposits.

"We are doing whatever they are asking us to do," he said.

"I’m not the bookkeeper. There was a bookkeeper here that was here for 20 some years. I trusted her and I still trust her, and I don’t think she ever took a penny out of this office," Hodge said of former head bookkeeper Vicky Paul.

"I’ll stand behind these girls 100 percent. I do not do the bookkeeping. I rely on them to keep me in line. That’s why we have bookkeepers, I’m a cop."

Fuel cards

The fee audits describe how the sheriff did not provide adequate oversight of $177,464 of fuel credit card purchases for the three years – $61,578 (2005); $46,314 (2006); $69,572 (2007). Auditors could not determine if all of the fuel purchased was for official use.

Hodge said that his office has used the same system for years and auditors had never had a problem with it before.

He said the pin number for a deputy’s gas card is the last four digits of their social security number, which was an additional way of keeping track of who spent what on fuel.

"If somebody starts buying way more gas than the rest of them that isn’t hard to catch," Hodge added. "We have changed it though."

Drug and alcohol accounts

Concerning the lack of controls over drug and alcohol accounts, auditors found that in 2005 the sheriff deposited $19,311 to and expended $17,655 from the drug account.

Informants received $16,540 from the drug and alcohol account to make drug and alcohol buys, listen to the scanners and provide information to the sheriff’s department, according to the audit.

Auditors couldn’t determine how much each informant received, and noted that if they received more than $600, then a 1099 form should have been issued to report the income, but that none were.

Auditors were unable to identify the source of four deposits totaling $10,151 since the deposits tickets simply indicated that "cash" and "checks" were being deposited and these four deposits could not be traced to any court orders awarding the funds to the sheriff’s department.

In 2006, auditors were unable to identify the source of nine deposits totaling $967 since the receipts ledger simply indicated a "name" and "donation" or "restitution."

In 2007, the sheriff maintained a handwritten log explaining the purposes of the drug account expenditures, but there was no signed documentation maintained to show that the checks cashed were actually given to the informants.

"The sheriff did not design and implement proper controls over the receive and subsequent disbursement of drug and alcohol related transactions. In addition, the sheriff did not maintain minimum documentation as adopted by the Kentucky Sheriff’s Association," auditors wrote.

Hodge agreed to repay the account $6,255 out of his personal funds for expenditures from the account from 2005-2007 that were either undocumented or disallowed, according to a review of the audit.

Hodge said that he wouldn’t write any informant a 1099 form for safety reasons. "If I wrote them a 1099, they would die the next day," he said.

Hodge said that his office set up its drug fund the way they believed auditors wanted it.

"Our drug fund is set up by their rules. If they change the rules in the mean time, they need to tell somebody," Hodge said.

Seized assets

Auditors also found that the sheriff’s office was awarded a 2005 Ford Mustang and $30,549 in cash seized as part of a drug-related arrest in 2007.

According to the audit, the vehicle, cash, and all of the items of personal property recovered by the office were to be forfeited to the office. But auditors found discrepancies with the sale of the mustang.

Hodge said that his office sold the vehicle and put the money in the bank, but that when the vehicle was licensed the purchase price was listed for less than what his office received for it.

"Evidently I signed there that it was worth $1,000 or some dollars. The difference I have to pay back," Hodge said.
Each finding in the five audits offers recommendations to the sheriff’s office to strengthen and improve oversight of his fee accounts.

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