Audit Reveals Accounting Problems at This Arizona Pension Fund

A lack of internal controls was partly to blame for accounting errors, the audit showed.

Phoenix, Arizona (Joshua Lott/Bloomberg)

Phoenix, Arizona

(Joshua Lott/Bloomberg)

Staff turnover, database changes, and a lack of written policies and procedures led to accounting problems at Arizona’s Public Safety Personnel Retirement System, a new audit shows.

The audit, performed by Tuscon-based auditing firm Heinfeld, Meech & Co. and discussed at a Wednesday PSPRS meeting, showed that as a result of these issues, the retirement system misreported certain investments and overstated net appreciation in fair value and fees, among other issues.

The communications director for the $11.2 billion retirement system, Christian Palmer, said that pension reforms from the state legislature, as well as a lawsuit resulting in refunds for certain plan participants, created a challenge for its accounting department.

“The PSPRS accounting staff really had their work cut out for them,” Palmer said by phone Thursday. “As a result of all they had to handle, the board of trustees was very interested in making sure all our statements were accurate.” Hence, he added, the audit.

That audit found that another major contributor to accounting problems was staff turnover. The long-serving head of the PSPRS accounting staff left in mid-to-late 2019, while a new chief financial officer signed on in late 2018, Palmer said.

What’s more is that in March 2019, the retirement system’s internal auditor left for another role and the position still hasn’t been filled, the audit showed. Last year, its chief administrator, Jared Smout, was terminated in July for allegedly sexually harassing and spying on employees, Institutional Investor reported at the time.

A new chief, Mike Townsend, began working at the retirement system in December, a letter sent from PSPRS board chair Will Buividas to the state’s legislature and governor showed.

“It appears that some of the previous staff may have failed to adequately communicate information to the board as it related to the financial books and records of the system as well as the systems to manage and maintain those records,” according to that letter.

According to Palmer, the retirement system plans to hire at least three or four more employees for the accounting department.

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The pension fund’s audit showed that accounting errors were made during its fiscal year 2019. About $1.2 million in cash and short-term investments were reported as “other receivables” in financial statements, instead of as “cash and short-term investments,” the audit showed.

What’s more is that the retirement system’s staff both overstated and understated contribution while overstating expenses, the audit said. Employee contributions were understated by about $3.9 million, while net appreciation in fair value and investment expenses were overstated by around $3.1 million, the audit showed.

What makes these misstatements especially concerning for the retirement system, though, is a lack of internal controls for its process. The accounting system does not allow management or employees to prevent or detect and correct misstatements “on a timely basis,” the audit showed.

“There simply is no accounting system that will allow a public pension system to handle the amount of incredible demand that our pensions put on them,” Palmer said. “We have three separate pensions with three separate employee tiers, along with the refunds to deal with.” He added that with all of these challenges, the misstatements were small, particularly compared to the size of the fund.

According to the audit, the retirement system could remedy these issues by creating an internal controls process and by hiring more accounting staff.