Marco Island City Council Chairman Erik Brechnitz shocked his fellow council members and City Manager Mike McNees when he made a motion to fire McNees.
At a regular meeting of the City Council on Monday, July 7, Brechnitz shared that the Fiscal Year 2024 audit of the city’s financial statements that he said he found on the city’s website contained a “material weakness of internal reviews” and followed that up with a motion not to renew McNees’ contract, essentially firing him. The material weakness had to do with reporting of a federal grant.
“I feel very strongly that I have lost confidence,” Brechnitz said, citing a list of 18 concerns he handed to fellow council members before speaking. Among them was not sharing the material weakness with the council as soon as McNees learned about it. Other items were over the past six years, and most have been dealt with, McNees said.
Councilman Darrin Palumbo initially seconded the motion so the council could discuss and then rescinded his second agreeing to re-address the issue at a later date after hearing directly from the city’s independent auditor. The motion died for a lack of a second but not without a lot of discussion and anger.
McNees said he knew the audit had been completed in late June and filed to the State of Florida at the deadline of June 30, but he hadn’t seen the audit letter yet and was surprised to learn that it had been posted to the city’s website to the public before it was presented by the auditor to the city council.
“It’s feels like a set up to me. It feels like an ambush,” said McNees, who has been city manager since July 1, 2019. “If you want to know why you haven’t seen the audit letter it’s because I haven’t seen it yet. There’s no intent to withhold it, I haven’t seen it yet.”
What is a material weakness in financial statements?
A material weakness, when reported by an auditor, indicates a serious deficiency in reporting and suggests that a misstatement could occur. It’s a flaw in how a company, or municipality in Marco Island’s case, manages its financial reporting. The independent auditor – CliftonLarsonAllen LLP – determined that Marco Island’s controls did not allow for finding such flaws and need improvement.
Naples-based CliftonLarsonAllen was hired in 2024 as the city’s auditor, replacing Mauldin & Jenkins, which had been conducting Marco Island’s annual audit for 10 years, according to City Clerk Joan Taylor.
“I encouraged them to do their most extensive and detailed dive into our (numbers) specifically because we had had the same auditor for a long time,” McNees said of CliftonLarsonAllen.
“The moment that this material weakness was discovered, the council should have been notified,” Brechnitz said.
Marco Island Finance Director Gil Polanco said the city received the audit June 26 and had to get it to the state by June 30, which it did. It was later than usual for an audit for the fiscal year ended Sept. 30, 2024, Polanco and McNees said. With a new auditor and questions about auditing style verses previous auditor, it took longer, McNees said. The auditor will make a presentation to the City Council about its findings but they weren’t available until the Aug. 4 council meeting, Polanco said.
Brechnitz said he spoke to a managing partner at the firm twice in the past week, which prompted questions from other council members about his surprise presentation to them. Why hadn’t he talked directly with McNees before the July 7 meeting?
“You ambushed him. You did,” said Councilman Rene Champagne. “I hope you’re proud.”
“Ambush” aside, what about the financial statements?
What is the issue with the city’s financial statements?
CliftonLarsonAllen wrote a separate report on “internal control over financial reporting and on compliance and other matters.”
In that report, the auditor wrote that it does not “express an opinion on the effectiveness of the city’s internal control.” But “we identified certain deficiencies in internal control … that we consider to be material weaknesses.”
The audit looked at Florida projects compliance that could have a “direct and material effect” on each of the city’s federal and state projects. “In our opinion, the city complied with all material respects, with the compliance requirements.”
CliftonLarsonAllen found a material weakness in grant accounting and reporting and in audit adjustments.
On the grant, the city didn’t account for grant expenses and revenue in the correct period, according to the audit. The $750,000 federal disaster grant came after Hurricane Irma in 2017 and paid for generators, which didn’t work for two years, Polanco said. That was a difference in accounting opinion between the former auditor and the current one, he said.
“The issue and the difference of opinion is that we received those generators; they didn’t work for two years, so we couldn’t bill for those grants. In my opinion, we don’t have a receivable from the federal government until we are able to fix all the issues that we had to the generators. And it did take two years,” Polanco said. “The auditors, in their opinion, they say no, you can recognize that receivable at the time that you expended those funds. So those are the two opinions, and I could have argued it, but that would’ve held up the opinion; it wouldn’t held up the audit.”The auditor recommended the city implement procedures to report grant expenditures when eligibility requirements are met, not when funds are requested or received. It also proposed restating beginning balances of net position and fund balance.
“Significant deficiencies” were identified as not enough documentation of review in quarterly progress reports related to a Department of Homeland Security disaster grant and late quarterly progress reports on Florida Department of Environmental Protection water quality grants.
“I still wonder why the auditor isn’t presenting this information to us,” instead of Brechnitz, Champagne said.
The earliest the auditor could be added to the agenda, per the city’s process of agenda items being advertised at least a week in advance, would have been July 21, McNees said.
“The actual audit was still a moving target until was submitted one week ago tonight,” he said. “When I found out it have been submitted, as Gil mentioned, I talked to him right away and said, ‘when can we get the auditor to present this report?'”
“The representation that has been made is that the audit was late because a lot of things were in play is false, is false, is absolutely categorically false,” McNees said. “I’ve been in direct contact with the lead auditor of this for some time. … There were points of accounting being argued. There were changes being made that affected many different schedules on the audit. There were esoteric issues being pointed out that were beyond even my MBA training to understand.”
Polanco said he will ask the auditors if they can be available for the July 21 city council meeting.
“At the end of the day, we did still get a clean opinion” Polanco said.
“And that statement really doesn’t dirty it up?” Brechnitz asked.
“That would be up to the partners to opine on what it is, but it is still a clean opinion,” Polanco said.
Brechnitz wasn’t convinced and said McNees or Polanco could have sent an email to the board saying there were issues in the audit. “You don’t think that wasn’t important for us to know?”
Usually, the auditor explains their findings directly to the council, Polanco said. And that is scheduled for Aug. 4.
“I am seriously concerned about it,’ Brechnitz said. “I believe in a public company this would not be permitted.”
Champagne, who retired in 2007 as Chairman and CEO of ITT Educational Services Inc., said he disagreed.
“Any material weakness is certainly serious, but you don’t fire people necessarily on a material weakness,” Champagne said. “The auditor though, is responsible to come before the board of directors and explain what the findings were. Some are more serious than others, but a material weakness definitely is something you don’t want to brush aside.”
“This stinks,” said Councilwoman Deb Henry. “This is sneaky.”
Councilman Darrin Palumbo said because of state Sunshine, or open meetings, laws, Brechnitz couldn’t send any information to the council in an email or call to talk about his concerns, though he could have spoken with McNees and Polanco.
“It’s uncomfortable and backstabbing and wrong, but this is in the Sunshine Law,” Palumbo said. “So, it’s a bold thing for you to bring up a grievance.”
Councilwoman Tamara Goehler said she would have liked more information as the audit was ongoing.
“I wish you would have let us know about it,” Goehler said.
This article originally appeared on Marco Eagle: Marco Island city manager under fire by City Council chair over FY24 audit
Reporting by J. Kyle Foster, Naples Daily News / Marco Eagle
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