The Front Royal-Warren County Economic Development Authority operated in the red for two years due mostly to unauthorized spending, audits show.

The long-awaited reports for fiscal 2018 and 2019 released this week reveal the EDA’s financial picture for the two budget periods. The EDA’s former Executive Director Jennifer McDonald worked for the authority until she resigned halfway through fiscal 2019. McDonald and, at least in a civil case, co-defendants have been accused of using EDA money to conduct schemes and real estate deals.

Harrisonburg firm Brown Edwards conducted the audit and the EDA Board of Directors accepted the reports on Tuesday. Chairman Jeff Browne and directors Greg Howard, Scott Jenkins, Marjorie “Jorie” Martin, Dr. Thomas Patteson and Jim Wolfe attended the meeting and voted in favor of accepting the audits.

But the EDA lacked any control over who could authorize spending its money in the fiscal periods, the audit states. The EDA and Warren County have taken steps to control authority spending.

Browne spoke by phone Wednesday about the findings in the audits.

“From our standpoint, you know, the audit clearly shows there were unauthorized expenditures those years,” Browne said. “From a practical matter, it allows us to move forward; one, to join the county’s auditing process; two, to, you know, show our banks what’s going on.”

The board did not approve millions of dollars in expenditures during the audited years, Browne explained. But the EDA’s internal policies left the door open for management, including its executive director, to sign checks and spend authority money. The EDA has since changed the rules and Warren County now holds the ultimate authority over spending.

“One of the more important things is just that the county department that’s best able to handle these things is the Finance Department,” Browne said. “It makes total sense. I don’t understand why this wasn’t done from the beginning.

A lack of oversight into the EDA’s spending provides the easiest way to make unauthorized expenditures, Browne said.

“It’s just like you’re asking for it,” Browne said.

McDonald stands charged in federal court with counts of money laundering, wire and bank fraud, and identity theft. She also is in the process of a federal bankruptcy case. The EDA also accused McDonald and co-defendants in a civil suit in Warren County of using authority money without permission for personal gain.

The EDA board roster changed during the audit period. The membership in fiscal 2018, from July 1, 2017, through June 30, 2018, included Patty Wines, Greg Drescher, Bruce Drummond, William Biggs, Brendan Arbuckle, Ron Llewellyn, Gray Blanton, Mark Baker and Jim Eastham. Wines died in July 2017 and Eastham in November 2017. Arbuckle resigned in the fall of 2017. Patteson joined the board in February 2018.

The board roster changed in fiscal 2019 — July 1, 2018-June 30, 2019. Biggs resigned in October 2018. Drescher and Llewellyn resigned in March 2019. Drummond resigned July 9, 2019. Patteson, Blanton and Baker remained on the board through fiscal 2019. Jeff Browne and Greg Harold joined the board on June 18, 2019.

The auditors looked at the EDA’s internal controls, specifically a separation of duties.

“No one employee should have access to both physical assets and the related accounting records, or to all phases of a transaction,” the auditor’s report states. “We noted proper segregation of duties was not established in various functions related to cash receipts, cash disbursements, wires, related party transactions, noncash transactions, credit cards and accounts payable.

“We also noted a lack of review and approval of journal entries, disbursements, wire transfers, and bank reconciliations at the Authority,” the report states. “Lack of review and approval increases the risk of unauthorized transactions remaining undetected.”

The auditors recommended that the EDA take steps to prevent officials from performing conflicting duties. Auditors recommended that all journal entries, receipts, disbursements, and bank reconciliations be reviewed and approved by an individual other than the preparer.

Warren County now oversees and controls much of the EDA’s finances through an agreement reached between the two entities. The fiscal agreement requires an independent review of all EDA expenses and approval by the board chairman and treasurer before the county’s financial administration can process the transactions. The Board of Supervisors must approve all expenses prior to payment. EDA management no longer holds final authority to spend money nor can personnel issue or sign checks.

Auditors recommended that the EDA implement steps to improve its financial reporting process, which should include a detailed analysis of all intergovernmental agreements. EDA management agreed in its response and noted that a forensic review of the financial records for the two fiscal periods was conducted to determine unauthorized expenses during those years.

The auditors also reported that EDA officials may have violated rules governing the authority’s spending.

“Former members of management were allegedly able to override internal procurement and contract procedures,” the audit report states. “Non-compliance with the Virginia Public Procurement Act and internal policies could result in a direct and material effect on the financial statement amounts.

“Additionally, these transactions include significant and material transactions with related parties, which indicates abuse as defined by Government Auditing Standards as misuse of authority or position for personal financial interests or those of an immediate or close family member or business associate,” the report states. “The State and Local Government Conflict of Interests Act prohibits local government officers or employees from participating in certain transactions in which they or their family members have a material financial interest.”

Current management identified $961,576 in transactions in 2019 considered unauthorized and allegedly fraudulent. Management also identified $1,616,758 and $5,691,705 in transactions in 2018 and for periods prior to 2018, respectively, considered unauthorized and allegedly fraudulent.

The auditors recommend that the EDA take steps to look into its internal policies on procurement, contract approval and compliance with the Virginia Public Procurement Act. The auditors also recommend that the authority take steps to ensure the EDA, its employees and management comply with the State and Local Government Conflict of Interest Act.

The financial statements also reflect the authority’s involvement in litigation as a result of alleged fraud related to the audit periods and in prior years. Certain members of EDA’s current management did not work for the authority during those periods.

“We were unable to obtain written representations from previous management of the Authority concerning transactions prior to May 8, 2019, which took place under the previous management,” the auditor reports. “We are unable to perform procedures to conclude on completeness of all identified related parties and related party transactions or completeness of commitments and liabilities associated with the alleged fraud ...”

The auditor’s report goes on to state: “Our procedures related to transactions alleged to be fraudulent or unauthorized were limited to reliance on current management’s conclusion and limited corroboration for the basis of these matters.”

Current management tried but could not obtain and provide an update from the Environmental Protection Agency and FMC Corporation related to the work at the former Avtex Fibers site, the auditors note.

– Contact Alex Bridges at abridges@nvdaily.com