Consideration of Fraud in Rye's Audited Financial Statements

(This one’s a long kinda technical one folks. But if you care about cleaning up Rye City Hall, as Rye United pledged they would, you’ll be helping them by being aware of what happened when the city’s independent auditors tried multiple times to flag what turned out to be a massive financial fraud at Rye Golf Club - and what Rye’s political class did about those warnings. The auditors are not without fault themselves, as you’ll find at the bottom of the article. But what’s still such a mystery is how so many worked for so long against the interests of truth, trust and transparency to stonewall the Club members and the rest of the Rye taxpayers.)

Year after year after year after year – the Certified Public Accounting firm of O’Connor Davies Munns & Dobbins, LLP has faithfully reported they have found “no significant deficiencies or material weaknesses” in the internal financial controls of The City of Rye.

And here’s how they define those terms -

“A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency or combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.”

Phew – sounds comforting, right? Sounds like they’ve checked things out, were independent and skeptical as required, followed generally accepted auditing standards (GAAS), and were able to issue their usual unqualified opinion on Rye’s financial statements under generally accepted accounting principles (GAAP).

Great. Let’s forget the city council meetings from now on and tune-in to the Yankee game, already in progress.

Except – wait – except for what some here still want us to ignore, forget, claim is a side-show, phony scandal or delegitimize.

And that is the FACT that regular citizens – not elected officials or political appointees – not the paid city staff – not the city attorney – and not the auditors - had to run the gauntlet of unanswered FOIL’s and high-bench TV charges of “incivility” by the City Manager, the City Attorney and a Majority of the elected members of the City Council to expose – wait for it –

THE LARGEST FINANCIAL FRAUD AND LOSS IN CITY HISTORY.

So given this fact, here’s a rundown about our real “internal controls” for your consideration. Text here is taken directly from that expensive, uncomfortable, unpleasant, and what some would surely claim uncivil, document delivered last February 23, 2013 to a shocked, shocked Rye City Council.

“7. Opportunities to Prevent or Shut Down the Scheme Are Missed

Current (now former) City Manager Scott Pickup recalled that in 2005 he had been involved in discussions with Corporation Counsel (this is current Deputy County Executive Kevin Plunkett, former employer of Kristen Wilson, Rye’s current Corporation Counsel) regarding potential labor issues that might arise from RGC using staffing companies, but he did not recall any discussions regarding which staffing company would be used and did not recall hearing the name RM Staffing until later.

Former (now current) City Manager Frank Culross, former City Comptroller Michael Genito and then-Deputy Comptroller (now Acting Comptroller) Joseph Fazzino each recalled a brief discussion during which Mr. Yandrasevich stated that RGC was going to use a staffing agency to provide workers to RGC.

Some of them thought that Mr. Yandrasevich may have mentioned RM Staffing, but none of them was aware that RM Staffing had been established at Mr. Yandrasevich’s behest.

It does not appear that any current or former employee in the Finance Department or at City Hall ever questioned Mr. Yandrasevich or RGC regarding any of the RM Staffing invoices.

There appears to have been no effort on the part of the Finance Department or by any current or former City Manager to scrutinize the accuracy of the invoices or review them for potential fraud.

Instead, each current and former employee who reviewed the invoices relied on Mr. Yandrasevich to confirm that the invoices should be paid.

In early 2010, the City’s independent auditors from O’Connor Davies Munns & Dobbins, LLP were onsite at RGC in connection with their audit for year-end 2009.

As reflected in the Independent Auditors’ Report on Communication of Internal Control Matters Identified in the Audit for 2009, the outside auditors stated that they had not identified “any fraud or illegal acts,” but they identified a number of issues, including with respect to RGC and relating to RGC’s use of staffing companies to provide labor.

In particular, the auditors expressed concern regarding the fact that these staffing services were not subject to a competitive bidding process and that there were no written contracts.

(Our Auditors previously wrote on May 21, 2010 – “It is our opinion that competitive bidding is required for these services similar to other services provided to other City departments. At a minimum, documentation should be readily available, including a Signed contract outlining the services to be performed, the rates to be charged and clearly specifying that all applicable employment laws are being followed.”)

On June 17, 2010, Mr. Pickup met with Mr. Yandrasevich and then-City Comptroller Jean Gribbins to discuss the auditor’s findings. In their interviews, Mr. Pickup and Ms. Gribbins both stated that they had little recollection of this meeting beyond a discussion of the need for RGC to provide at least three rate sheets for staffing companies before processing a purchase order for a vendor like RM Staffing.

During the 2010 audit in early 2011, O’Connor Davies made some effort to follow up on their findings from the 2009 audit by asking Mr. Yandrasevich to provide an update on the RGC- related issues.

(Our Auditors previously wrote on March 18, 2011 – “The City utilizes outside contractors to staff the restaurant, catering hall, kitchen, clerical workers, supervisors of the restaurant and manual laborers for capital projects as needed. Our inquiries with Golf club management revealed no bids are obtained for these services. In addition, there are no signed contracts or City Council resolution authorizing the services.” (The Council that originated these arrangements was headed by Mayor, now New York State Legislator, Steve Otis)

“Recommendation: The City should determine if competitive bidding is required for this unique situation. It is our opinion that there should be at least a formal Request for Proposal (RFP) and a signed contract that would outline the services to be performed, the rates to be charged and clearly specifying that all applicable employment laws should be followed.”)

Mr. Yandrasevich provided a written response, but that response did not address the fact that there still was no written contract between RGC and RM Staffing.

There appears to have been no further follow up on any of these issues.

Further, although in early 2010 former (now current) City Manager Frank Culross expressed a concern to the City’s outside auditors regarding a potential ownership relationship between Mr. Yandrasevich’s wife and RM Staffing……….it does not appear that the outside auditors….or anyone else….were able to substantiate the concern.”

(And this concern, expressed directly to an auditor, by the acting most senior member of the municipality’s management team (Mr. Culross) about another senior city manager (Yandrasevich) concerning a staffing company that has - no written contract, arrived without competitive bidding nor RFP, about which there is no record of council discussion nor approval, requires - at a minimum - extraordinary analysis, scrutiny and documentation (like drilling this issue all the way to China in layman’s terms) because – well, it’s all in here for those who care -

American Institute of Certified Public Accountants – Professional Standards – AU-C Section 240 - Consideration of Fraud in a Financial Statement Audit