Knox County audit committee reviews single-audit findings, flags reconciliation problems and $154,500 in rental-assistance fraud

The Knox County Audit Committee received the external auditors governance letter and single-audit compliance report on March 19, which outlined seven findings and related corrective-action plans. Ted Hotez of Pew CPAs told the committee auditors did not identify any material weaknesses but did report multiple significant deficiencies and one federal-award finding that requires disclosure.

Hotez said auditors had recorded several audit adjustments that were reclassifications and did not change net position or fund balances. He noted the $6,000,000 sale of the Andrew Johnson building was reclassified for government-reporting purposes but left net results unchanged. "They really were reclassification type entries," Hotez said.

The auditors identified reconciliation issues involving trustee liability accounts, where receipts without clear coding left outstanding reconciling items. Hotez said some discrepancies dated from prior years but that finance and the trustees office were working together and had made progress: "Some of the reconciling items from a year ago have been resolved, but not all of them," he said. Committee members asked staff to follow up on vendor and software options (eGov and the countys ERP) to support timelier reconciliations.

The Clerk and Masters office was flagged for missing month-end close procedures and unreconciled accounts from Sept. 2022 through March 2023 amid personnel turnover. Scott Griswold, Clerk and Master of the Knox County Chancery Court, told the committee the office had "corrected all of the issues," hired staff and paid excess fees due to the county.

Auditors reported a positive-pay control failure in the finance department that allowed about $50,000 in checks presented by third parties to clear after an employee erroneously approved them. Perry Benchhoff of Knox County Finance said the incident is under investigation by Knoxville police and, as of the meeting, "we have not recovered anything at this point." Staff described steps taken to strengthen controls, including secondary supervisory review of flagged items.

Auditors also described misuse and alleged theft of school-purchased equipment that led to a police report; Knox County Schools confirmed the employee no longer works for the district and human-resources and law-enforcement follow-up is underway.

The single-audit section included a federal-award finding related to the Emergency Rental Assistance program. Hotez told the committee that "fraudulent disbursements appear to be approximately 154,500" and that, unlike an earlier year when outside parties were paid, the most recent fraud involved internal personnel who created and approved fraudulent applications. County staff and auditors said the matter is under investigation and that no restitution has been confirmed.

Committee members pressed for clarity on which findings were classified as significant deficiencies and which were compliance exceptions; Hotez said most of the first four findings were significant deficiencies and number 7 was the federal-award finding. He emphasized auditors had not found material weaknesses but that the items were important to disclose to governing bodies and the state comptroller.

Internal-audit director Zach Fullerton also briefed the committee on ongoing internal reviews (fleet management, sheriffs office IT inventory, and school fleet work), recent closed control reviews (health-department fee collections and a non-departmental account), and tools and training (Highbond subscription renewal options and the GAO Yellow Book 2024 updates). Fullerton reported strong assurance scores on the closed reviews and said staff will continue risk assessments to inform the FY25 audit plan.

Next steps identified in the meeting included follow-up on trustee-office reconciliation progress and vendor recourse, continued cooperation with law enforcement on fraud matters, and implementation of added finance controls. Auditors and staff said corrective-action plans accompany the report and that the county will monitor remediation in the coming year.

The committee did not take a formal vote on the audit findings themselves but requested staff follow up and directed that the state-format audit contract addendum be recommended to the County Commission (see separate item).