MJMEUC-MoPEP gets an “F” on their 2007 audit Management Letter

The audit. MJMEUC-MoPEP’s fiscal year ends on December 31^st, so on June 7, 2008 they received the results of their annual audit for the 2007 fiscal year from Williams Keepers, LLC., the CPA company MPUA (“the Alliance” as they call it) has employed for several years to do the annual audits on all their sub corporate affiliates. You probably know that a CPA firm is hired to do an annual audit of your city council, school district or other public entity. “The Alliance” which includes MJMEUC has to have the same annual audit. What you probably don’t know is that along with the audit is a document called the “management letter.” The audit is formally presented in a public meeting by the auditor to your elected officials who sit in glassy-eyed silence through his 20-minute presentation because they have no freaking idea what the hell he’s talking about. After the auditor has finished speaking-in-tongues he asks his clients if they have any questions about their audit. They wake up and cut nervous looks at each other, each one praying some one else will think of a token question to ask that doesn’t sound too stupid so they can end this torture and move on to talk about something they understand like sewers or police cars. It’s like high school when you promised God you would never look at Playboy again if the teacher wouldn’t call on your lazy unprepared ass and make you look a fool in front of the whole class.

Some genius finally stutters “A-h-h-h…is this ah-h…a clean audit?” The auditor smirks and says, “Well, that’s not exactly a professional term but yes, I’d say it was a “clean” audit. [I’ll say it’s a ring-tailed baboon if that’s what it takes to get my check and get out of here.]” The next day the local paper headline reads, “Idiots get a CLEAN audit” misleading the public into believing that no one is embezzling or mismanaging their tax money in city hall, the school district or county. The sad fact is that every case of embezzlement is preceded by several “clean” audits. Audits have only one chance in 327 of catching someone stealing public money. Embezzlers are not found out by auditors, they’re exposed by pissed-off co-workers who rat them out.

The Management Letter. What no one talks about in the public meeting where the auditor is presenting his incomprehensible audit report, is the other document he was also required to prepare by Generally Accepted Accounting Principles or GAAP and that document is called the “management letter.” This important letter was concealed in a plain brown wrapper and slipped to the alpha dog official before the meeting started. It tells management what they’re doing wrong and management hopes you never find out about it. The “management letter” contains things the auditor found that were; violations of law, a breach of public trust, violations of GAAP or just plain stupid. All those goodies are hidden in the ‘secret’ management letter but the management letter isn’t really a secret - management just wishes it could be. The management letter is a part of the audit and both were paid for with your taxes so if you demand to see under the Sunshine Law they have to give it to you. Even though the management letter is supposed to tell the whole truth, most auditors tend to take it easy on their clients or use a lot of audit jargon to disguise what they’re saying or they tell the worst of the bad news verbally so as to leave no fingerprints. If they always told the bald-faced truth they wouldn’t be invited back to do more audits and make more money.

*GAAP: the Generally Accepted Accounting Principles is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.

The “Sarbanes-Oxley Act” One fallout of the Enron disaster is the 2004 Sarbanes-Oxley Act which, in Section 404, requires CFO’s like Duncan Kincheloe to take full responsibility for their audit reports. If the audit report and management letter sucks then whining “But I didn’t know,” by the CEO making the big bucks can get him/her a jail sentence these days. The SOA also stuck it to “sweetheart” auditors who have been much too kind about what they say in their management letters to protect their sources of income. They are no longer allowed to whisper the worst of the bad news in the CEO’s shell-like ear or discuss it at a closed board meeting where the public can’t hear, now they have to put it all in writing in the management letter.

That’s why it was such a surprise to read the June 7, 2008, Williams Keepers, LLC management letter to the MJMEUC-MoPEP 2007 audit that “we identified certain deficiencies in internal control over financial reporting that we consider to be significant deficiencies and other deficiencies we consider to be material weaknesses.” That sentence said this was not going to be the usual tap-on-the-wrist management letter.

Material weaknesses and significant deficiencies in an audit are really bad things. How bad are they? The cover letter explained. “A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity’s internal control.” Williams Keepers continued, “…because of inherent limitations in internal control, including the possibility of management override of controls, misstatements due to error or fraud may occur and not be detected by such controls.” “Material misstatement” is an auditor’s way of saying “everything in this audit may be false.” The term “management override of controls” means the books were cooked because the boss ordered someone to do it. (all emphasis marks when quoting the audit report are this editor’s)

A Nov. 18, ‘04 CFO.com article, “Where Material Weaknesses Really Matter” by Marie Leone explained that material weaknesses are divided into two categories: "Category A" material weaknesses, according to Moody's, concern control problems with specific transaction-level processes such as tax accrual, bad-debt reserves, and impairment charges. These require attention, but Doss maintains that external auditors can effectively "audit around" them and still deliver an unqualified opinion of the financial statements. The less-common "Category B" material weaknesses, however, cannot be circumvented by auditors. These offenses can derail an organization, stresses Doss, because they represent "company level" control problems such as ineffective control environments, audit committees, and financial reporting processes, encompassing everything from a lax code of conduct, to feeble fraud-prevention guidelines, to poor attempts at assigning executive responsibility.” The MJMEUC audit and management letter has a lot of “Category B” material weaknesses in it not the least of which is using Quickbooks (for Dummies), and not being able to find $340,000. Then there is the problem of being three years behind on recording the size of the contingent liabilities that each MoPEP town is responsible for due to the Billions in debt for coal-fired plants.
The phony Fitch Ratings reports. None of these systemic failures, these material weaknesses, show up in the 2005 MJMEUC audit and MJMEUC claims to have “lost” the 2006 management letter, but for the 2007 audit Williams Keepers suddenly got very busy and is going back over those three years to “restate” the audits. The Fitch Ratings analysts who gave MJMEUC their credit rating which was the only way they could take on so much debt, only saw – what the auditor now admits - were two very flawed MJMEUC audits and which Williams Keepers now says didn’t reflect MJMEUC’s real financial condition because they’re going back and “adjusting” and “restating” those old audits. Those audits didn’t even come close because the billions in debt weren’t included.

MJMEUC’s 2005 audit management letter contained only two mild cautions, one about their inadequate Quickbooks software and a recommendation to cross-train their billing personnel. They claim they can’t find the 2006 management letter. The 2005 and 2006 audits were the critical years for submitting copies of the audits and certain written assurances to Fitch Ratings to get a good rating for their participation in the Plum Point, Prairie State Energy Campus and other coal-fired plant investments as well as the $10,000,000 Kincheloe and MJMEUC borrowed from banks. If the information in this management letter had surfaced in 2005 or 2006 - as it clearly should have - the Kincheloe house of cards would have collapsed. If Fitch Ratings had seen this 2007 management letter there would have been no $10,000,000 in loans and no billions in revenue bonds to leverage more debt in a failed technology that is daily becoming more costly than it will be worth in a few years.

Williams Keepers is now busy “adjusting” or shoehorning project cost schedules on the $2 Billion plant investments and “reclassifying” already recorded transactions to make them fit the GAAP accounting regulations. Gee, this will be swell news for all the non-reading MoPEP true-believers who have locked the financial future of their communities into this organization that unbeknownst to them has a perpetual first lien on all their electric revenues, an organization that has a choke-hold on all their power forever but which now they find out has been run by people who can’t keep their books straight. That is, it will be if they ever hear about it, but it’s highly doubtful that any of the true-believing Mo-PEP-ers have seen the ‘07 management letter or will ever see it. It’s even doubtful the board members of MJMEUC have seen it – as I said, it’s not a secret but management will try to keep it a secret if they can… including saying they lost the ’06 audit.

These were part of the material weaknesses they found in the 2007 MJMEUC-MoPEP audit:

1. Material Weakness in MJMEUC. MJMEUC has been using Quickbooks software for its general ledger. This is a material weakness for all their operations. With MJMEUC-MoPEP’s several unique and extremely complex business operations it would be impossible for them to perform some calculations such as figuring out why the MoPEP towns are spending $4 per kilowatt to make electricity out of diesel fueled generators (their WWII technology) but are selling it to MoPEP for a few cents on the dollar then letting MoPEP sell the same kilowatts back to them with MJMEUC’s markup. Using Quickbooks to try to keep track of the costs and liabilities on their $2 BILLION in highly-leveraged revenue bond investments is like sending Lance Armstrong to ride the Tour de France on a tricycle.

The auditor said that prior to MJMEUC’s involvement in the joint ownership projects MJMEUC’s activities largely consisted of, “passing along (sic) through monthly billing the costs of power purchased on behalf of its members with “appropriate markups to cover administrative overhead.” Being a markup middleman was a relatively simple process until Kincheloe went on a spending binge that ran MJMEUC and all the MoPEP and UPPA contractee’s into a massive $2 Billion debt to purchase shares in high-risk, coal-fired power plants. The auditors pointed out the difference, “MJMEUC now must account for the capital costs of these projects; for sophisticated debt financing transactions; for more complex arrangements for purchases from various power and transmission suppliers; and for the methods of recovering these costs from its members in periods sometimes far removed from the dates when costs were incurred.” Ouch! So, because Kincheloe - the business genius who invented the Great Diesel Generator Farm Project and who thought it was a good idea to rush into $2 Billion in shaky coal-fired investments when wiser heads were dumping them- has been using cheap software designed for Home Ec classes so your bills have probably been wrong but they’re not sure why they were wrong or by how much.

2. Prior audits were inadequate and left out a whole lot. The auditor has been trying to “help MJMEUC catch up on its accounting,” because they have apparently been behind since about 2005 or longer! The auditor reported, “MJMEUC’s accounting staff has not been able to maintain the general ledger on a timely basis in a manner that supports preparation of financial statements in accordance with GAAP.” The auditor explained that, “To further help MJMEUC catch up on its accounting, during the 2006 audit we analyzed and prepared documentation for the activity in the Bank of New York’s trust accounts that are tied to debt financing, as well as documenting new debt activity and reconciling project cost schedules to the general ledger. We then made many adjusting entries to the general ledger to record these transactions and reclassify already recorded transactions in order to present them in accordance with GAAP.” The result of using elementary accounting methods and a staff that could not cope with the complicated debt repayment issues MJMEUC was getting into, was that while the “internally produced monthly financial reports provide adequate information with respect to assets, liabilities, revenue and expenses for the funds for General, Power Interchange Alliance and MoPEP regular operations, they do not present information on the various power plant projects and their financing in accordance with GAAP.” In other words, the information on the “little money” has been barely “adequate” but the audit reports and financial statements have not presented information on the “big money” - the billion dollar investments. That is one hell of a material weakness.

3. Staffing problems. The 2006 audit had to be delayed until July 2007 in part because of “the many accounting adjustments.” MJMEUC’s staff couldn’t cope with all the demands of maintaining a correct “general ledger and supporting documentation in accordance with GAAP during 2007.” The auditor noted that another factor was that the staff was spread too thin and they were too inexperienced to cope with the “increased complexity of accounting needs, and lack of available supervisory time.” Then it gets worse.

4. Material Weakness in MoPEP Power Revenues and Costs. During the 2007 audit the staff noticed that the “revenues and costs on their Quickbooks general ledger for the year’s power sales and related costs did not appear to be accurate. Costs recorded in Quickbooks exceeded recorded revenues from MoPEP members by a significant amount.” The auditor concluded that, “There was either a problem with the accounting or a problem with the billings that had been rendered to members.” They identified about half the losses which were delayed MISO billings but can’t find the other half. As of the time of the management letter the accounting company had made “accounting adjustments….that significantly reduced the loss…to costs that should have been passed through dollar for dollar to members to approximately $340,000.” So out of about $700,000 or more of this mysterious vanishing money they adjusted half of it to reduce the embarrassment but they still can’t figure out if the remaining $340,000 fell behind a filing cabinet or its bills they should have passed down the billing pipeline to make the MoPEP members pay. Guess which one it’s going to turn out to be.

The upshot of the whole management letter is that there have been not minor but significant irregularities, significant deficiencies and large errors in MJMEUC’s bookkeeping going back to at least 2004 or earlier which still haven’t been satisfactorily identified or resolved they’ve only been partially… “adjusted” or “reclassified.” Those errors have not only impacted the MoPEP billings which were passed on down the line to local ratepayers but this amateur fumbling has also kept the audits and all financial reports to the members from accurately reflecting the information members should have had on what was happening with the cost overruns in $2 BILLION of high-risk, highly leveraged investments in power plant projects.

So, even if MoPEP members had been inclined to ask the right questions to make MJMEUC show some accountability to its members, and even if Kincheloe had been inclined to tell them the naked truth about their bloated and growing financial hazard, they wouldn’t have gotten the right answers because MJMEUC can’t keep their books in order so they wouldn’t have known what the right answers were! Now they’re going to buy better accounting software to replace their Quicken (for Dummies) bookkeeping system but like they say, “garbage in, garbage out.” Computers are only as accurate and as honest as the people who use them.

When will the 32 city council’s that walked blindly into their MoPEP contract without reading it get the answers they’re entitled to about Kincheloe’s investments, answers they should have gotten from the 2005, 2006 and 2007 audits? Where are the facts about the contingent liabilities for MJMEUC’s debt that each city needs to know and the reports on the cost overruns on Kincheloe’s coal-fired plant projects? The MoPEP contract made the city members responsible for every penny of MJMEUC’s investment debt therefore it is a “contingent liability” and as such should be shown in all their audits as it was for the first time this year in Owensville’s audit by Verkamp & Malone, CPA’s of Rolla.

How have the plant construction cost overruns impacted our MoPEP bills already and what will the impact be on local electric rates for the next 40 years? Have the project engineering reports on cost overruns been kept secret from MoPEP members because Kincheloe and the MJMEUC board are afraid their MoPEP sharecroppers will bolt if they know how bad the cost overruns are or have they been kept a secret because MJMEUC is running an amateur back room operation so bad that even the MJMEUC board doesn’t know how great a financial mess they’ve dragged everyone into with their investments?

These are the 2008 “Leaders” of MJMEUC, the board members who have had direct contact with the auditors. They’re the men who should have known all about these “material weaknesses” and how serious they were. These are the utility managers, the MJMEUC board members who are responsible but who were obviously asleep at the switch while all these problems were piling up: The MJMEUC Chairman is Bob Williams (Carthage), Vice Chair is Jim Roach (Jackson), Secy/Treas. is Darrell Dunlap (Fulton), Chair. Engineering Comm. is Royce Fugate (West Plains), Chair Operating Committee is Kyle Gibbs (Marshall), Chairman Budget and Finance Committee is Dan Watkins (Rolla), Chairman Power contract/MoPEP is Chad Davis (Trenton), member (no big title) Mark Petty (Kirkwood), Immediate Past Chair is Scott Miller (Springfield).

Audits and management letters are the CEO’s report card. This audit and management letter gets a big fat “F.” Normally when an executive gets an audit with management letter this lousy he is invited to resign. What is the MJMEUC going to do? Will they clean house starting at the top or take the cowards way out and pretend this bad report card doesn’t exist?