WINTHROP — Town officials have a lot of work ahead of them to correct a host of financial management deficiencies identified by an auditor and prevent future problems.

Auditor Ron Smith presented 15 recommendations for school and municipal officials to improve Winthrop’s finances, which he graded a D.

Smith said the problems include a low fund balance, a lack of key policies, poor accounting practices and the existence of 22 town accounts that are outside government officials’ control.

He said the town needs to close all but three of the accounts, cancel the debit cards connected to the accounts, include all capital improvement projects in municipal and school budgets, put all expenditures on warrants for the Town Council and school board to review, and create a closer connection between the school finances and those of the rest of the town.

“We’re going to encourage a lot of talking and a lot of communication because I think the time for that is now,” Smith said at a special Town Council meeting on Monday. “The lack of communication has put you in some dire straits that you’re in.”

Presenting a special audit report, Smith said his firm found 22 bank accounts in the town’s name that are used to spend hundreds of thousands of dollars without Town Council or school board approval.

Maine Municipal Association spokesman Eric Conrad said he doesn’t know how common it is, but Winthrop is not the first place where an audit has turned up off-the-books accounts using the municipality’s tax identification number.

“In many cases, the practice dates back years or decades,” Conrad said. “It often starts innocently enough; there’s a legitimate reason to open a new account, and someone says, ‘Just go open an account.’”

Conrad, who attended Winthrop’s meeting as a resident of the town, said the association recommends against the practice because the municipality can’t control the accounts but could still be at risk if something goes wrong.

Smith suggested that the fiscal officers for Winthrop Public Schools and the other town departments collaborate more closely, possibly even forming one finance department, and Conrad said an arrangement like that would not be out of place in Maine.

“It makes sense because it’s essentially one town entity,” Conrad said. “That kind of stuff is happening all over the state: shared positions, collaboration, job sharing.”

The checking accounts identified in the audit are associated with nearly every town department, including the school department, and are marked by questionable accounting practices, such as missing receipts and account custodians with only tenuous connections to town government, including former employees.

The school-related accounts handle $200,000 to $225,000 per year, with about 15 people authorized to write checks. The accounts related to the other town departments, such as the Fire and Police departments, handle $50,000 to $100,000 per year and also have about 15 total authorized signers.

“That’s 30 additional people, some with no relationship whatsoever to do with the town of Winthrop, Maine, controlling your money,” Smith said at the Town Council meeting.

The problem developed over a period of years, Smith said, because neither the people who opened the accounts nor the banks and credit unions where the accounts are held understood who should control town accounts, according to the town charter and state law.

Smith said he was not asserting that money was misappropriated, but the accounting practices left opportunities for abuse. For example, when an account for Winthrop High School’s class of 2012 was closed last year, a check was written to an individual, but Smith said he couldn’t tell how the money was spent.

Smith’s firm, RHR Smith & Co., started examining the Winthrop’s accounts and practices last fall when it assumed the role of town auditor. In June, Smith recommended that the town delay approving a school budget, given the lack of clarity about the school department’s finances and all the outside accounts.

The Winthrop Public Schools board approved a budget, but the Town Council rejected it and hired RHR Smith & Co. to perform a special audit.

More than 70 people, many of them school employees, attended the meeting on Monday. Smith’s presentation and questions from audience members and councilors took more than three hours.

Smith previously spoke with town and school officials about improving their practices, and he said some problems have already been solved. The school department, for example, has ended the practice of using money from student activity accounts to buy Sam’s Club memberships for teachers and their family members.

Most of the accounts should be taken out of the town’s name, Smith said, such as employee association accounts for law enforcement and ambulance employees.

Smith said, however, that each school building should have a student activities account, for money from student fundraisers and gate receipts from athletic events, for example. But the town should not transfer tax money into the accounts, as has happened in the past, and about $50,000 in student activity fees intended to subsidize the school budget should be turned over to the town for that purpose.

Smith said he doesn’t know much about the school board’s proposed budget for 2013-14, and he’d want to know more before making a recommendation on whether to send it to voters.

School Superintendent Gary Rosenthal said the school department is chipping away at problems the current leadership inherited, such as the questionable accounting practices and deficits in food service and summer salaries.

Rosenthal said he did not hear much in Smith’s report that was new, given conversations between Smith and school officials.

“I don’t think anything rose to the level of illegality,” Rosenthal said. “It think it comes down to common practice, best practice and improvement (of) your practice.”

Town Council Chairman Kevin Cookson said the audit report provides more clarity about the town’s financial situation, including the school department; but he thinks the school board still will need to cut employee health insurance before Town Council will approve a school budget.

Cookson was receptive to Smith’s suggestion of a central finance office to handle school and municipal business.

“It’s all one pot of money, it’s all town funds; so having one person responsible, I think, would be much easier,” Cookson said.

Susan McMillan — 621-5645
smcmillan@centralmaine.com