Restated financial statements for fiscal 2001 and fiscal 2002 recently were accepted by the Crestwood Board of Aldermen.

Aldermen voted unanimously last week to accept the restated financial statements for the two fiscal years after hearing a presentation by Larry Pevnick of Brown Smith Wallace, the city’s independent auditing firm.

The Board of Aldermen voted in October to approve an ordinance selecting Brown Smith Wallace as the city’s independent auditing firm. Besides performing an audit for fiscal 2003, the scope of work to be performed by the firm included restating the city’s financial statements for fiscal 2001 and fiscal 2002.

Brown Smith Wallace is the same firm that performed a forensic audit of the city’s books for fiscal 2001 and fiscal 2002.

The forensic audit alleges that two former Crestwood officials violated the City Charter, numerous ordinances and their duties as fiduciary officers in their handling of the city’s finances. In November, the city filed a lawsuit in St. Louis County Circuit Court alleging that former City Administrator Kent Leichliter and former Finance Officer Robert Wuebbels breached their fiduciary duties by manipulating financial records to misrepresent the city’s true financial condition to Mayor Jim Robertson and the Board of Aldermen.

During his Jan. 27 presentation, Pevnick told aldermen, “I’m happy to report that we have completed our work which put us in a position to reissue the financial statements of the city of Crestwood, Mo., for the years ended June 30, 2001, and June 30, 2002. I’m also happy to report that no other adjustments were necessary beyond those that were previously identified in our forensic audit. So what we did essentially is we re-reviewed the financial records of the city for the years in question.

“We reviewed the audit work papers of the previous auditors who originally opined on these numbers, applied some additional audit procedures as required by our professional standards such as we reviewed some additional minutes. We verified and discussed with attorneys any subsequent events. We confirmed certain balances and reviewed certain bank statements and other financial information to put us in a position to issue an opinion on those same financial statements, including those adjustments that we previously identified as part of our fraud audit,” he said.

The restated financial statements for fiscal 2001 result in a general fund deficit of $204,072 instead of the previously reported positive fund balance of $45,928, Pevnick said.

“The city restated its 2001 financial statements to properly account for the general fund borrowing $250,000 from the internal service fund,” according to the restated statements. “This borrowing was previously reflected in the city’s June 30, 2001, financial statements as a transfer from the internal service fund to the general fund.”

“… So what we did in effect when we reissued these financial statements is we reversed that transfer and recorded it as a liability in effect to the general fund,” Pevnick said. “So, in other words, we restored the million dollar fund balance in the internal service fund …”

Robertson interjected, “Just for a point of clarification — in round numbers was the effect of that adjustment be to turn what was reported as a $45,000 surplus into a $205,000 loss?”

Pevnick said, “Yes sir.”

Robertson said, “Thank you.”

Pevnick said, “Absolutely. There was a $45,928 fund balance prior to that adjustment. The fund balance equity or lack thereof in the general fund now is a negative $204,072 …”

The restated financial statements for fiscal 2002 result in a general fund deficit of $973,497 instead of the previously reported positive fund balance of $132,334.

Noting that the fiscal 2002 restatement involved two components, Pevnick said, “The first component dealt with some additional expenditures within the Parks and Storm-water improvements fund. We had to properly reflect that as revenue to that fund because, in essence, what happened is previously paid expenditures were submitted to the bond trustee on the COPs (certificates of participation) participation grant and revenue was received by the capital projects fund, or the parks and stormwater improvements fund to be more specific, and so we added $349,215 of funds received to properly reflect that transaction. Previously what occurred were expenses were reduced by $349,215 in such fund to mask the true expenditures in that fund.”

Pevnick then read a paragraph from the restated fiscal 2002 financial statement: “Additionally, the city restated the fiscal year 2002 financial statements to reflect the actual amount of revenues and expenditures in the general fund, capital improvements fund and park and stormwater improvements fund. General fund revenues decreased $68,910 and expenditures increased $786,921; capital improvements fund expenditures increased $583,329; and park and stormwater improvements fund expenditures decreased by $76,713.

“These changes are the result of unsupported and unauthorized journal entries being posted in the fiscal year 2002 to transfer a total of $786,921 in expenses from the general fund to the capital improvements fund and park and stormwater improvements fund that were reversed in the restatement process. The original unauthorized journal entries were recorded through the use of inter-fund general ledger accounts.”

Regarding the restated fiscal 2002 statements, Pevnick said, “You’ll also notice in the general fund, there’s over $3,153,000 of monies now owed to all the other governmental fund types,” he said. “Primarily those funds are owed because in prior years there were no separate cash accounts set up for any funds …”

Noting that the capital projects fund has a positive equity of $3,069,880, Pevnick said, “So most of the money that is owed or due to other funds, which is recorded in the general fund, most of that money is actually owed back to the capital improvements fund because the capital improvements funds should have money to represent their fund equity. They should have cash, cash or receivables. So most of that money now has been used in the general fund operations for 2002 and beyond,.”

Robertson said, “Before we move on. My memory tells me that this, what you’re talking about now, was originally budgeted to be expended from the general fund in a budget that was approved by this board and then it was sent someplace else?”

Pevnick said, “Yes sir.”

Robertson said, “And the effect of that was to result in a positive balance or a positive year report for ’02 when, in fact, it was a fairly substantial loss?”

Pevnick said, “That’s correct.”

Robertson said, “That’s the essence of it?”

Pevnick said, “That is the essence of it.”

The Brown Smith Wallace representative noted that work is proceeding on the city’s fiscal 2003 audit, which will help provide an estimate of fiscal 2004 balances.

“… The good news is the adjustments were limited to adjustments that were previously found throughout our fraud audit and with the assistance of the city staff as well,” he said of the restatement of fiscal 2001 and 2002.

Robertson said, “And the bad news is that that still means that the years that were reported as finishing in the black actually were in the red.”

Pevnick said, “That’s correct.”

Ward 2 Alderman Tim Trueblood later asked Pevnick to clarify something he previously said. “… I thought I heard you say that, rather you used the word fraud to describe your original audit. Is that correct?”

Pevnick said, “That is correct.”

In a related matter, the Board of Aldermen voted unanimously to adopt an ordinance changing the city’s fiscal year to a calendar year, effective Jan. 1, 2005. The city’s previous fiscal year ran from July 1 to June 30.