Published: August 19, 2008 08:12 am      

Latest Knox audits find problems

State Auditor’s Office releases audits from 2006-07, finds more problems during former judge-executive’s term

By Sean Bailey / Staff Writer

Former Knox County Judge-Executive Raymond Smith — who is scheduled for sentencing today in U.S. Federal Court on mail fraud crimes — could be facing more charges upon the release of State Auditor Crit Luallen’s final two audits of Smith’s administration.

The 2006 and 2007 fiscal year audits — which detail more than 50 findings and millions of dollars in questionable expenditures — included evidence that Smith awarded construction projects to a nonexistent company, did not have proper paperwork for credit card purchases, and took personal possession of county-ordered office furniture. The findings have been referred to the U.S. Attorney’s Office, the Internal Revenue Service, the county attorney’s office and the Kentucky Department of Revenue for further review.

Luallen’s press release highlights some of the “serious findings” in each audit. One such case in 2006 included “questionable payments” of $113,173 made to a company for various county road projects — a company that Smith may have financial interest in.

Because there were questionable endorsements — cases where checks were cashed and deposited by individuals other than the payee — an organizational search of the company was performed on the secretary of state’s Web site, and no such company was found.

A search was also done to see if this “company” had ever paid occupational taxes — and no records of any payments were found. The audit found that of the $113,713, only $44,483 contained check endorsements. There were also no purchase orders issued for payments to the company.

This finding, and six others, were referred to the U.S. Attorney’s Office.

Also, the audit questioned $4,144 in office furniture that was ordered in July 2005. According to the auditor’s office, the furniture wasn’t picked up until Feb. 19, 2007, after Smith left office.

According to current Judge-Executive J.M. Hall, the furniture has never been brought to the judge-executive. Instead, Hall said the furniture store owner told Hall that Smith and two men allegedly loaded the furniture onto a rental vehicle.

“We don’t have the desk or any of the other furniture. The state police and the FBI have been notified to where we think the furniture is, so we should be getting it back,” Hall said.

This state auditor issued a “disclaimed opinion” for the 2006 and 2007 fiscal years, meaning the auditors could not assure the accuracy of the county’s financial statements.

A portion of the 2007 audit occurred during Hall’s term. Hall, who was elected in November 2007, was given several recommendations to strengthen controls and oversight of his office, which Hall has agreed to implement.

“Again, our audits found very serious problems in the office of the former Knox County judge-executive. After years of continual mismanagement in the Knox County’s Judge’s office, we are encouraged by the current judge’s willingness to adopt our recommendations and improve oversight of his office for the benefit of the taxpayers of Knox County,” Luallen stated in an e-mailed press release.

Hall said his administration has been cooperating with the auditor’s office and has completed implementing their suggestions.

Going into the judge-executive’s office in 2007, Hall said he knew there would have to be changes made — but he never knew the extent of the problems left by the prior administration.

“We didn’t know what to expect. There isn’t really a transition period in this office, so at the same time we were all moving in, the auditors were coming in too, to do their investigation,” Hall said.

The 2007 audit included the last six months of Smith’s administration and the first six of Hall’s. Hall said he requested the state begin the audit as soon as possible so his administration wouldn’t carry over bad practices unknowingly.

“We want to be open and correct what needs to be corrected. We requested that the 2007 audit be done as soon as it could so we could get everything corrected,” Hall said.

Smith pleaded guilty to federal mail fraud in March, stemming from 2003-05 audit findings that Luallen’s office turned over to the FBI. He could face up to 20 years imprisonment and a $250,000 fine.

Between May 1, 2003 and May 1, 2006, while serving as Knox County judge-executive, Smith allegedly created false bidding documents that stated businesses — including Grade All Construction, Partin Construction, Marion Trucking and Kentucky Phoenix — made bids on public road, construction and water projects for Knox County.

Those companies never made any bids for the projects, and when the bids were approved by the fiscal court, Smith allegedly had companies owned or managed by he and his family do the work.

Smith could not be reached for comment Monday afternoon.

The entire audit report can be found at http://www.auditor.ky.gov/Public/Audit_Reports/ Archive/2007KnoxFCaudit.pdf

The following is a partial listing of what the auditor’s office called “serious findings” and “questionable costs” in the 2006 and 2007 fiscal year audits.

2006 Audit

• The county did not follow proper purchase and procurement procedures that resulted in more than $2 million of expenditures that failed testing procedures.

• During expenditure testing, auditors found that some invoices were absent or did not provide adequate documentation to support expenditures. There were other instances where invoices were not paid timely. Auditors selected 121 invoices for testing totaling $2.7 million. Auditors’ testing showed expenditures had inadequate documentation or no receipts. Several invoices were not original and were either a faxed or copied invoice, causing auditors to question their legitimacy. In addition, 33 road fund invoices were improperly itemized and did not include the description of work performed, location, and the amount of hours and rate per hour.

• More than $4,000 in credit card expenditures could not be appropriately validated and were not properly documented.

• Auditors chose five months of credit card statements to test for a total of $10,265 in charges. Of the $10,265 of credit card expenditures tested, only $5,709 had proper documentation to support the expenditure, leaving $4,556 without adequate documentation. Several expenditures were for travel, meals or miscellaneous supplies.

2007 Audit

• The county did not follow proper purchase and procurement procedures that resulted in more than $962,000 of expenditures that failed testing procedures.

• Some invoices were absent or did not provide adequate documentation to support the expenditure. There were other instances where invoices were not paid timely. Auditors selected 163 invoices for testing totaling $1.8 million. Auditors’ testing showed expenditures had inadequate documentation or no receipts. In addition, 50 road fund invoices were improperly itemized and did not include the description of work performed, location, and the amount of hours and rate per hour.

• The former county judge-executive owes the county $6,118 due to overpayment of vacation time not permitted by Kentucky law. The maximum salary for the county judge-executive in calendar year 2006 was $79,247 and a training incentive for 2006 of $3,302, totaling $82,667; however, payroll records and reports filed indicate that the former county judge-executive received $88,667, which is $6,118 in excess of the amount that should have been paid by statue.

• Prior to leaving office, the former administration prepared the last payroll under their administration. Included in this was a check to the county judge-executive. The notation on the check was for vacation time. This check should not have been paid to the county judge-executive. Elected officials are not entitled to vacation and sick leave time. Their positions are elected and therefore do not have attendance requirements.

• The former administration made multiple transfers prior to fiscal court approval. A total of $467,779 of transfers were either transferred prior to fiscal court approval or the auditor was unable to verify that approval was given.

• $2,546 of credit card expenditures could not be appropriately validated and were not properly documented.

• The county failed to bid and the fiscal court did not approve some of the transactions in regards to the purchase of 10 Dodge Chargers for the sheriff’s department.

•Innovative Communications — which, according to the Kentucky Department of Revenue and Secretary of State, is owned and operated by the chief deputy sheriff — was paid $30,500 to install radios and other equipment into the Dodge Chargers that were purchased for the sheriff’s department by the fiscal court. The county did not follow local laws because it did not seek any bids on the equipment.

• The former Knox County judge-executive entered into an agreement with a private corporation (Pacer Health Corporation) to lease the Knox County Hospital with an option for the corporation to buy the hospital — but the county didn’t have ownership of the hospital at that time. The ordinance authorizing the county to assume full responsibility for the hospital operations was not effective until Feb. 20, 2006, which is 19 days after the agreement was executed. This ordinance was not presented to the fiscal court until Feb. 22, 2006, 25 days after the agreement was executed and two days after the effective date of the ordinance.

• Auditors chose five credit card statements to test for a total of $13,468 charges. Of the $13,468 of credit card expenditures tested, only $10,922 had proper documentation to support the expenditures. Several expenditures were for travel, meals or miscellaneous supplies. Auditors inquired of the finance officer to see if travel vouchers existed to support expenditures related to meals and travel and were told there are no such files. Three credit card statements had finance charges, and multiple expenditures showed the county paid sales taxes.

• Fiscal court minutes were not complete, nor adequately maintained, according to auditors. In general, the official fiscal court minutes were “in a complete state of disarray with post-it-notes, scribbling, unbound pages, folded papers, and items that had nothing to do with what should have been in the fiscal court minute books.” The minutes were not detailed enough to provide adequate information to the public or to the auditors.