City Controller Rebecca Rhynhart reveals the findings of her office’s annual Report on Internal Control on Compliance and Other Matters on Tuesday. —TRIBUNE PHOTO / MICHAEL D’ONOFRIO

Philadelphia’s sloppy handling of taxpayer dollars and weak financial oversight has created an environment ripe for fraud, abuse, and waste.

City Controller Rebecca Rhynhart issued that warning during the release of the office’s annual report on Tuesday that reviewed the city’s finances and financial controls for fiscal year 2017.

In addition, she revealed her office will open a fraud investigation into $33 million of missing city funds. Mayor Jim Kenney’s Administration and the Finance Department, she added, have failed to adequately bolster oversight of the city’s books even while issues have lingered for years.

“Philadelphia’s internal controls are weak. … But worse yet, the mayor’s administration hasn’t yet shown the urgency that this problem deserves,” Rhynhart said during a press conference on the 12th floor of the Municipal Services Building where her office is located.

The office’s Report on Internal Control On Compliance and Other Matters found two “material weaknesses” and eight “significant deficiencies” in the city’s internal controls over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, that result in a reasonable possibility that a misstatement of the city’s financial statements may not be prevented or detected and corrected on a timely basis.

A significant deficiency, while less severe than a material weakness, is a deficiency, or a combination of deficiencies, that warrants attention such as a payment voucher approved without required management authorization.

The most glaring material weakness, which City Council members have been clamoring about for months, is in the city Treasurer’s Office.

The Treasurer’s Office failed to reconcile, i.e. balance, the city’s largest and primary cash account for nearly three years starting in 2015. The cash account is supposed to be reconciled every day.

When the account finally was reconciled in June 2017, the city’s account showed $33 million more than the bank’s balance. While the Finance Office has said the unaccounted for funds have been reduced to $28.6 million, the Controller’s Office could not verify that amount.

The missing money opens the city to the potential for wrongdoing fraud, Rhynhart said.

“This is taxpayer money that neither the finance director nor the treasurer can account for. … If you can’t locate it, you don’t know where it is — it’s missing,” she said.

The Treasurer’s Office also has failed to reconcile an additional six bank accounts, some dating back as far as 2010, Rhynhart said.

Director of Finance Rob Dubow and City Treasurer Rasheia Johnson have already provided a plan to the Controller’s Office to address the reconciliation process, Rhynhart said. The city also has hired Horsey, Buckner & Heffler LLC, a minority-led accounting firm, to settle its books for $500,000.

No evidence of fraud has been discovered as the investigation into the missing $33 million begins, Rhynhart said.

The second material weakness revealed in Rhynhart’s report led to nearly $924 million in accounting errors in the Finance Office.

The Controller’s Office identified those financial errors during a review of the Finance Office’s Comprehensive Annual Finance Report for fiscal year 2017. They have been corrected.

The errors were the result of inadequate staffing levels, a high turnover of staff, a lack of technological investment, and insufficient oversight in the Finance Office, the report found.

In addition, “massive errors” in the work done by the Finance Office have been cited by the Controller’s Office for the past 11 years, Rhynhart said.

The Finance Office, Rhynhart said, lacks a plan to correct these mistakes going forward.

“But there is no concrete action plan; there’s no detailed timeline; there’s no plan to give any confidence that this won’t be happening again next year,” she said.

The eight significant deficiencies cited in the report were:

Payment vouchers approved without required management authorization;

Allowing unauthorized individuals to approve bi-weekly payrolls increases risk for improprieties;

Failure to segregate payroll duties could allow fraud to occur;

Capital asset control deficiencies increase risk of reporting errors;

Failure to timely transfer funds between the city’s bank accounts could result in significant reporting errors;

Lax monitoring of adjustments to tax accounts may lead to undetected errors or irregularities;

Standard Account Practices require updating to ensure accurate and consistent application of accounting rules and regulations; and

General information technology controls require strengthening.

Rhynhart called on Kenney to urgently correct the city’s financial practices.

“The time is now for the mayor to address these issues with the importance that they deserve,” she said. “To come up with an action plan, not just for the missing $33 million, but for the other findings.”

Mike Dunn, a spokesman for the mayor, said in an email that the issues that led to $33 million going unaccounted for started under the past administration, and Kenney has put in place controls to prevent similar issues in the future.

Kenney also has formed a Reconciliation Task Force, which Rhynhart is expected to participate in, Dunn said.

“Full cooperation across city agencies represented within the Task Force will ensure that efforts are not duplicated, taxpayer funds are used efficiently, and this matter is resolved quickly and accurately,” read a portion of Dunn’s response.

He added: “We obviously wish this could be fixed overnight, but a problem like this requires time to be fully resolved responsibly. We look forward to completing this process by year’s end.”

Among the largest cities in the country, Rhynhart said Philadelphia “by far is the worst in terms of weakness and internal controls.”

Philadelphia’s 10 financial control issues outnumber the other top nine cities in the country. Only San Jose, Calif., with one material weakness and five significant deficiencies, comes close, while New York; Los Angeles; Chicago; Houston, Texas; San Diego, California; and Dallas, Texas, reported no findings at all.

A single material weakness at a company, Rhynhart said, significantly increases the likelihood of fraud.

Councilman Allan Domb, who was at the press conference, has been among the most vocal council members to criticize the city’s financial mismanagement and missing $33 million.

When asked about the report, Domb said, “I agree with the controller; I agree we should take this seriously; and I agree that we need to manage our taxpayers’ money more efficiently.”

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