Ernst and Young’s forensic examination of more than $1 billion in cashflows through the Centerra urban renewal plan has uncovered a pattern of questionable accounting practices and noncompliance with the city’s master financing agreement.
In its latest update to the Loveland Urban Renewal Authority board on Tuesday, the firm reported that after close scrutiny of 73 cash disbursements and nine public bid awards from Centerra’s main metropolitan district, auditors found that district managers often misclassified expenses, conducted related-party transactions without much oversight and bypassed competitive bidding rules set in the MFA (master financing agreement).
“We went through a lot of different activity,” said Ernst and Young partner Gary Burke, describing the 5,587 files and 90,000 general ledger transactions reviewed by his team since June. “We wanted to make sure we selected samples to prioritize all the activity for the past 15 years, to make sure that we got some coverage, but didn’t boil the ocean, given the scope that we have on this matter.”
Ernst and Young’s review, which began in February, looked at three main activity areas dating back to 2009, five years after the urban renewal plan was adopted by Loveland City Council. Included in the review were the procurement process, the disbursement of funds and transactions involving entities related to the developer McWhinney Real Estate Services, Burke told the board.
In all three, he continued, auditors were trying to confirm compliance with terms of the MFA, a document that governs how taxpayer-supported revenues from the Centerra urban renewal area can be spent.
Among EY’s most significant findings was that the metro district did not use the formal, competitive bidding process spelled out in Exhibit L of the MFA, which mandates prequalification of vendors and selection of the lowest qualified bidder.
Instead, Burke explained that the district developed its own practice, evaluating proposals only after bid prices were revealed, allowing contracts to be awarded to firms that were not the lowest bidders.
“Public competitive bidding processes and the related controls are designed to ensure fair competition, transparency and accountability,” Burke said. “They prevent perceived or actual favoritism, corruption and misuse of public funds.”
Ernst and Young also found $6.2 million in project spending that was never put out for public bid, including design and maintenance work that likely met the MFA’s definition of construction. Burke’s co-presenter, Ernst and Young senior manager Chad Francis, also noted that bid abstract sheets, another MFA requirement, were “not able to be provided” by the metro district, leaving no audit trail to confirm that bids arrived before deadlines.
When it came to the cash disbursements examined, the auditors found weak internal accounting controls, including invoices coded to the wrong general ledger accounts, missing approvals and payments recorded in the wrong financial period. The metro district’s manager, Burke said, does not perform a monthly financial close, a standard accounting practice intended to catch such errors before reports are finalized.
Because of those errors, auditors warned that prior reports to LURA may have overstated or understated project costs. To ensure accuracy going forward, the team recommended the board require quarterly unaudited financial statements and routine reviews of the district’s books.
A separate portion of the review examined payments between the metro district and companies connected to the urban renewal plan, including McWhinney Real Estate Services, Centerra Properties West and Centerra Retail Sales Fee Corp.
While some metro district board members have declared employment or financial interests in those firms, board minutes show they have not recused themselves from related votes. Ernst and Young noted that the district has no formal procedure to document whether such transactions are made at fair market value.
As an example, Ernst and Young managing director Mark Russell pointed to a purchase of water rights for irrigation, which were transferred from McWhinney-related entities to the metro district without any written analysis of market pricing. Another involved $4.9 million in payments to McWhinney Real Estate Services for management, landscaping and marketing work dating back to 2009.
To enhance transparency in such transaction, Ernst and Young recommended that LURA require the district to perform and retain formal “arm’s-length” evaluations for all related-party contracts and to provide periodic reports listing those transactions.
After the presentation, Burke and his team fielded several questions from commissioners about the scope of the firm’s work and how its recommendations might affect existing agreements with the developer.
LURA board members did not take action Tuesday but did recess into a closed executive session to consult with legal counsel about the audit’s findings and potential next steps.
Burke said Ernst and Young’s next deliverable, due next week, will be a written report summarizing its Phase I work and outlining potential areas for deeper forensic investigation, including cost and time estimates.
