Audit of Detroit land bank flags weak controls, demolition records

Christine Ferretti
The Detroit News

Detroit — A new independent audit of the Detroit Land Bank Authority's accounting practices turned up concerns over vendor payments, demolition records to back up costs and weak internal controls.

The forensic audit commissioned by Detroit's auditor general examined four years' worth of financial statements, more than a dozen bank accounts and general ledgers to evaluate how city funding was recorded and spent by the land bank from Jan. 1, 2014, through July 30, 2019. 

The report by advisory firm Stout Risius Ross notes the land bank has strengthened financial oversight policies from what was in place in 2015, when its federally funded demolition program first came under scrutiny. The program has since been the focus of local and state reviews and a federal criminal probe that culminated in bid-rigging charges. 

An excavator tears down the vacant house at 17200 Waveney St. in August of 2020.

However, over the course of the review period, Stout found "irregular transactions" both before and after revised financial systems and policies were implemented including unexplained bank reconciliations and transactions not recorded in the land bank's ledger, unapproved vendor payments and payroll discrepancies. 

Stout's preliminary audit findings centered primarily on Detroit's controversial demolition-related activity, where it found the "largest lack of reporting" was the "inability of the land bank to provide a property-by-property accounting of amounts paid per demolished property" as well as the state-level reimbursements received under the federal program.

The audit also flagged worries over controls for the land bank's Demolition Advance Fund.

Land Bank Executive Director Saskia Thompson struck back in a 45-page response to the auditor general and to Detroit’s City Council, arguing in her Aug. 10 letter that the audit had “numerous errors, oversights, and omissions.”

Since November, she wrote, the land bank participated in at least 11 meetings with the auditor’s office and Stout, dedicating hundreds of hours to responding to requests and offering access to land bank offices for record reviews. The data isn't missing, she said.

"I want the information to be accurate whether it's a positive reflection of us or not and the information is not, and it bothers me as a public servant," Thompson told The Detroit News. "We've been under investigation for six years (over demolition) with lots of innuendo and finger-pointing. It adds more innuendo."

Detroit Auditor General Mark Lockridge said  his office and Stout "stand by everything we have." Raymond Roth, a Royal Oak-based CPA for Stout who authored the report, said in an email that it's based on information provided by the land bank and included in-person and virtual meetings, "as referenced and cited throughout the report and its exhibits."

"Stout stands by it; we stand by it," he said. "We didn't see anything (in the land bank response) that we thought would get us to change our position."

Stout's 99-page audit comes as Detroit transitions management of demolition from an effort led by the land bank and Detroit Building Authority to a city-run operation.

The city was awarded $265 million in federal funding to tear down 15,000 homes since spring 2014. City voters this fall will weigh a $250 million blight bond to tear down thousands more. 

The Stout report is among more than a half-dozen released by Detroit's auditor involving city and federally funded demolition work over the last four years. 

Lockridge began his review of Detroit demolition activities in fall 2015 after the federal hardest-hit program fell under scrutiny here over bidding practices and soaring costs.

The Stout report, he said, is expected to close out his office's demolition auditing. 

In November, Stout sought specifics on payments involving each property demolished. The land bank provided three separate reports between March and June but still hasn't been able to reconcile the request or provided incomplete information, according to the audit.

The audit contends the land bank has been unable to account for the amounts it has paid contractors and received as reimbursements for property under the federal program. 

Thompson rejected the claim: "We absolutely do have every expenditure. They just want us to be able to hit a button from the financial system in the format they request it."

The audit identified $315 million in payments the land bank made to 629 different recipients over the review period. However, 79 recipients — comprising $50.8 million in funds — “were made to recipients not included on the DLBA’s approved vendor list," the July 27 report contends. 

Of the $50.8 million, about $24.2 million went to (demolition) vendors with names similar to those on the approved vendor list. The remaining $26.6 million, it says, was paid to other vendors "not on the approved vendor list in any capacity."

"Even minor discrepancies in these details can be a red flag of fraudulent activity where an unauthorized payment is made but disguised as a legitimate payment to an approved vendor," it reads. 

Reginald Scott, the land bank's chief financial officer, stressed the finding is misleading.

All of the demolition contractors on the list cited by Stout are approved vendors, he said.

"There are no unapproved vendors," said Scott, noting financial software used by the land bank identifies any entity or individual that the authority has issued a payment to as a "vendor." The land bank, he said, engages in transactions with businesses, residents and grounds crews.

Stout’s lack of understanding of land bank operations, Thompson wrote in her response, "does not equate to a red flag of fraudulent activity.”

For fiscal years 2014 through 2019, Stout's audit said the city provided $30 million toward a Demolition Advance Fund.

The fund was established to provide gap funding between when demolition costs were incurred under the federal program and a nonprofit corporation of the Michigan State Housing Development Authority, which administers the program, paid out reimbursement.

The audit says the land bank was unable to demonstrate the advance fund was used for its intended purpose or if it has controls to prevent misuse.

Stout recommended tighter controls on approving vendors and funding recipients and urged the land bank to make reviewing and completing bank reconciliations a priority. 

Thompson and Scott both rejected claims that tight protocols are needed, saying they've long been in place.