Is a New Auditor the Answer to Montclair’s Financial Woes?

While a new auditor for the town might not solve all of Montclair’s fiscal problems, Councilman Cary Africk believes it’s a start. A start that should have started already.

“I’ve been pushing for this for a year,” Africk (below, right) said of his desire to hire a new auditing firm. “We’ve interviewed candidates. We said for the last two years we are going to look at this and still nothing.”

In proposing hiring a new auditing firm, Africk said he is simply looking to follow good business practices. Africk pointed out auditor rotation, as it’s called, is a recommended practice in the corporate world. But it’s not just for private businesses, anymore. In 2008 The New Jersey State Comptroller’s Office issued a report recommending procedures for the selection and use of audit firms. And based on the report Montclair isn’t living up to those recommendations, although they’re certainly not the only ones.

According to the report “many New Jersey government units are not selecting and rotating their auditors in a way that is in the best interest of NJ taxpayers.”

Africk stressed that he had no cause for concern with the current firm, Samuel Klein, but noted the town has been using this firm for over 20 years. “I don’t want to imply that something’s wrong,” Africk said. “It’s just about wanting a fresh perspective.” He added, “And basically no one on council shares my thinking.”

Well, there is one person. “It’s always a benefit to have some fresh, new ideas,” said Councilman Rich Murnick (below, left), who was surprised by the resistance Africk faced with the majority of the council especially in light of the governing body’s stated wish for transparency.

“Africk comes up with great ideas and suggestions. It’s unfortunate he meets with such resistance,” Murnick said. It could be quite unfortunate for residents according to the findings in Comptroller Matthew Boxer report. The report says, “External audits are a primary source of fiscal oversight for the spending of billions of taxpayer dollars.” It goes on to say, “The system being used to obtain external audit services in New Jersey is a significant obstacle to obtaining the quality audits that are central to the State’s financial well-being.”

Speaking of financial well-being, Africk emphasized the importance of hiring a new audit firm given the current economic conditions. “We want someone to sit down at the table as a partner to help us navigate these tough financial times.” He added, “Important information lies in the numbers, and we have to understand it.”

Africk looked to the Board of Education, which recently changed auditors, as an example. “I think there is a lot the town can learn from the BOE. They have gone over their budget with a fine-tooth comb.”

The council, however, appears reluctant to follow suit. “I don’t think the council is very aggressive in looking at fiscal matters,” Africk lamented.

While the council has been slow to take on the matter, there has been some movement. “We have interviewed auditors, and we have some attractive choices,” Africk said. Still, the pace on this issue is slow, and Africk noted other action taken by the council has him perplexed. “We got rid of the town manager and the attorney, who I thought was extremely competent, so I’m puzzled at why we are hesitant to change auditors.”

Residents might be puzzled, too, if they were to read the State Comptroller’s report. Residents from Glen Ridge and Livingston might be interested in reading it, too. Both those towns used their respective audit firm for 36 years. In 2009, however, Glen Ridge switched from their long-time firm, Samuel Klein, to McEnerney, Brady & Company, LLC.

The report, however, recommends procuring auditors through a “competitive selection process at a minimum of every five years.” And, “In no event should a government unit use the same audit firm for more than ten consecutive years.”

The report goes on to say that according to professional literature “scheduled auditor changes provide a check against lax analysis and reporting that can occur after a protracted relationship.” Lax analysis can arise when “familiarity fatigue” sets in. This is when, over a length of time, a firm develops a closeness to management that can compromise the independence of the auditor.

Another problem that can emerge without a set assignment period is an incentive to present clients with reports they’ll find agreeable in an effort to retain their business. Finally, rotating auditors regularly helps to ensure accountability. Firms are more apt to execute best practices if they’re aware their work will be reviewed by the firms to come after.

One striking example the report gave was of a 2006 audit of a NJ school district. The district had just switched firms after 17 years. While the former firm labeled the school as “low risk” with no control weaknesses, the new audit identified the school as “high risk” with 60 deficiencies.

Montclair’s CFO Gordon Stelter does plan to address the auditing issue in a memo for the council, but he said he was hesitant to speak about his recommendations before he issues his memo. He said he “needs to give it some in depth thought as there are two different sides on the issue.”

As for Murnick, he said right now he is focusing “100% of his efforts on the budget” that is being presented to the council this month. He has been working, as well, with the Operating Budget Accountability Committee (OBAC), which has been “constantly coming up with ideas to introduce to this budget.”

Murnick mentioned that he agrees with Governor Chris Christie’s tax cap, but said that he can do better. “The idea is to present a budget that doesn’t just meet the cap but comes in under the cap.”

Municipal building photo and map from Wikipedia.