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Peñitas may approve ‘review’ instead of audits

The city of Peñitas may approve a “review” instead of audits for 2018, 2019 and 2020.

Unlike an audit, which is designed to provide the public with a “high level of comfort on the accuracy of financial statements,” according to the Association of International Certified Professional Accountants, a review provides only a “basic level” of assurance the financial statements are correct. The review may also be prepared without an opinion from the auditor.

City Manager Humberto “Beto” Garza III said turnover at City Hall prevented Peñitas from preparing audits for 2018, 2019 and 2020 — and left the accountant unable to offer an opinion on the financial statements.

“The city recognizes that as the city grows, changes must be made to develop our professional staff. Through new changes that have been implemented something like this won’t happen again,” Garza said in a statement. “We’ve added a finance director and support staff to ensure future auditors will have the continuity of staff and management. We have also started sending staff to GFOA trainings to make sure everyone is up to date with current GAAP procedures and policies.”

GFOA is an acronym for the Government Finance Officers Association. GAAP stands for generally accepted accounting principles.

Cities in Texas are required to undergo an audit and prepare a financial statement every year.

“The annual financial statement, including the auditor’s opinion on the statement, shall be filed in the office of the municipal secretary or clerk within 180 days after the last day of the municipality’s fiscal year,” according to the Texas Local Government Code.

Peñitas fell behind after the 2015 fiscal year and never caught up.

The 2016 audit wasn’t completed until 2018, according to documents released under the Texas Public Information Act. The 2017 audit wasn’t completed until 2021.

Peñitas never completed the 2018, 2019 and 2020 audits.

On Wednesday night, the City Council approved an engagement letter with Raul Hernandez, an accountant from Corpus Christi, to handle the 2021 audit.

Without a current audit, a city may not be able to borrow money, apply for grants or qualify for other types of assistance.

Small towns frequently struggle to complete audits on time.

Garza said the city management team from 2018, 2019 and 2020 wasn’t available to assist the accountant with the audit.

Former City Manager Omar Romero resigned in 2021, when he pleaded guilty to bribery and bankruptcy fraud charges. Former Mayor Rodrigo “Rigo” Lopez resigned in 2022, when he pleaded guilty to theft.

“The auditor doesn’t feel that he can give an opinion without management’s representation,” Garza said.

When an audit is completed, the accountant issues an opinion on the financial statements. Cities strive for an “unmodified” opinion.

Accountants also issue other types of reports, including reviews and compilations, which don’t come with opinions.

“A review is substantially narrower in scope than an audit. A review does not contemplate obtaining an understanding of your business’s internal control; assessing fraud risk; testing accounting records through inspection, observation, outside confirmation or the examination of source documents or other procedures ordinarily performed in an audit,” according to information published by the association of accountants. “In a review engagement, the CPA will issue a formal report that includes a conclusion as to whether, based on the review, he is aware of any material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.”

Ray Eufracio, the former Hidalgo County auditor, said a financial statement without an opinion is similar to art.

What the financial statement actually means is “going to be depending on how you interpret it,” Eufracio said.

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