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(WBIR) A combined series of accounting errors between the Knox County Trustee's Office and the county's finance department during 2011 and earlier led the school system to operate under the guise that it had $1 million more in its reserve funds than it actually did during the past couple of years, according to a report made public to the county's Audit Committee on Tuesday.

No cash, however, actually changed hands and the money was never spent. The mistake occurred on paper only.

Still, auditors dinged the county for the snafu, saying it could eventually have led to more compounded accounting issues, and "resulted in unnecessary complexity in the Trustee's accounting records."

Since discovered, though, the mayor's office and trustee's office have corrected the matter, using more "stringent recordkeeping procedures" put in place last year at the recommendation of the Audit Committee, according to county Finance Director Chris Caldwell.

"There's no such thing as a good finding, but this is a good finding in the sense that the procedures worked and for the first time in a long time, there is a great communication between the Trustee's Office and the finance department that allows us to tie down every account," Caldwell said.

Interim Trustee Craig Leuthold agreed.

"We're going to get these accounts shifted right and define who is doing what," he said. "Part of the problem is that we never had who is definitely going to be responsible for these accounts, so when someone made an entry it could affect (someone) else's."

The county's Audit Committee spent part of Tuesday discussing the county's annual report, an in-depth analysis that delves into the fiscal year budget that covered July 1, 2012 through June 30, 2013.

In it, the external auditor, Knoxville-based Pugh & Co., cited three problems.

External auditors found a $2.4 million discrepancy between the county's financial books and the Trustee Office's financial books. They called the difference a "material weakness," a technical description that describes a misstatement which could take longer to correct or could be missed altogether.

The $2.4 million overstatement stemmed from a series of liability accounts that were never reconciled between the two departments for a number of years. Liability accounts, often called accrual accounts, don't actually have money in them, but rather focus on what is needed for future expenses.

The mistake led officials to believe that the county's reserve fund – and the school system's reserve fund – each appeared to have about a $1 million more in them then they really did. (The school system gets a cut of collected property taxes.)

Caldwell said now both offices have put procedures in place to fix the matter and to make sure it doesn't happen again.

"There is a silver lining here because the problem was found," said Larry Elmore, a CPA with Pugh and Co.

Auditors also noted two "significant deficiencies," mistakes that are slightly less damning than material weaknesses but still keep management from discovering a problem in a timely manner.

Auditors said the county's accounting systems doesn't produce reports that allow auditors to easily follow the county's capital assets, which include any equipment that's worth more than $5,000, like vehicles or buildings.

The county by the end of the month plans to bring in a consultant to tailor the reporting needs and resolve the matter, Caldwell said. The consultant will probably cost about $5,000.

The audit also said that the county at times didn't adhere to the Davis-Bacon Act, a federal mandate that requires officials to follow certain rules to ensure that the contractors who oversaw a series of low-income housing projects funded with more than $200,000 in "community development block" grants turned in the proper payroll paperwork.

County officials said turnover in the community development department at the time created a lapse in monitoring. The new employees have been trained in the proper procedures.

Neither Caldwell nor Leuthold were in charge of their respective departments when the mistakes occurred.

Mistakes that aren't corrected could end up affecting the county's bond rating, which could lead to higher interest rates when the county takes out loans or issues bonds.

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