Editor’s note: At the request of several readers, this article has been unlocked and is now available to everyone, regardless of subscription level.
The Town of Hopkinton has seen extraordinary turnover in recent months, and no department has been hit harder than Finance, which as of December 2, has vacancies for Chief Financial Officer, Town Accountant, and Payroll Manager. It is rumored that longtime employee and current Treasurer Diane Hendrickson is retiring in January, and yesterday Town Manager Norman Khumalo announced his exit.
While the town has posted several open positions to replace these key roles, the surprise exit of Human Resources Director Maria Casey could slow down the hiring process.
With so much turnover, it prompted the question: What financial controls are in place, and who enforces them?
In November, HopNews sought to test the strength of these processes. We created a “fake” invoice in the amount of $200 for an advertising campaign with a “real” sounding name; Ad for EV Expo by Sustainable Green Committee. On November 8 we sent it to Accounts Payable via email, expecting our request to be rejected quickly.
Two days later we received a reply asking us to supply an updated W-9, a required IRS form. We provided the W-9 for Arch Publishing, HopNews’ parent company. On November 21 a $200 check arrived by mail, signed by the Treasurer.
MGL Chapter 41, Section 56 explicitly describes the procedures for municipalities to pay bills. “The town accountant shall examine all such bills, drafts, orders and pay rolls” and “approval shall be given only after an examination to determine that the charges are correct and that the goods, materials or services charged for were ordered and that such goods and materials were delivered and that the services were actually rendered to or for the town“.
There were multiple points of failure in this process. In the first place, neither HopNews or Arch Publishing have ever performed work for the town, so the invoice would have required someone to create a vendor record in the accounting system. Second, although the description looked real, the advertising campaign didn’t exist. Finally, we identified the Sustainable Green Committee on the invoice; presumably no one on the committee was asked if this was a legitimate expense.
An Unmanageable Number of Approved Vendors
Our exercise was not a spontaneous occurrence. On October 10, HopNews requested and received a spreadsheet of all invoices paid by the town since October 2020. Over a nearly four year period, 87,866 individual payments were made to 6,311 vendors. Excluding employee salaries, which are by far the town’s largest expense, the town paid out $60 million in 2020, $61 million in 2021, $65 million in 2022, and $73 million in 2023. This equates to 17% increase in expenses over four years.
The biggest recipient of town funds is US Bank, which has been paid $57 million since 2020, for the payment of bond premiums and interest. The second largest expense is $43 million to Mass General Brigham, which administers the health plan for town employees.
Many personal finance systems, such as Quicken, support categorization for financial transactions. Users can categorize a check paid to “Price Chopper” as “Groceries”, for example, and later run a report of spending by category. Presumably the town’s accounting system does this too, but the export we received did not contain categories. Nevertheless, we made our best effort to categorize transactions by researching the vendors individually, and the top 20 expense categories are shown below.
Legitimate questions can be raised about some of this spending. For example, the town spent nearly $3 million on outside legal counsel over the period. If the town had hired an attorney, some of these legal expenses could have been handled internally, resulting in considerable cost savings. Similarly, the town spent approximately $334,000 on outside accountants when, until recently, they had a full accounting staff. Engineering costs were more than $6.5 million, presumably due to the Main Street Project, but the Department of Public Works has engineering on staff.
Who Determines Who Gets Paid?
Another serious concern is the overwhelming number of vendors. In private industry it is considered a best practice for companies to maintain both a preferred and approved vendor list.
A preferred vendor is an organization’s chosen supplier based on several factors, including quality, price, and customer service. A preferred vendor typically offers more favorable terms than a non-preferred vendor, and the organization may give the preferred vendor preference when awarding contracts.
An approved vendor is a supplier that has simply been deemed acceptable by the organization. An approved vendor may not offer the same benefits as a preferred vendor, but the company is confident that the approved vendor can provide acceptable goods or services.
From a financial standpoint, having a smaller list of vendors improves transparency and makes fraud easier to detect.
There is no documented vendor approval or onboarding process for the town. Essentially, any individual or company can get paid, provided they have supplied the town with a one-page IRS form. Over the ten months of 2023 the town paid 949 vendors, an extraordinary number of relationships to maintain for a department with such limited resources.
Town departments are not required to issue purchase orders to vendors, nor are vendors required to reference purchase orders when invoicing the town. This is in contrast to private industry where matching a purchase order to an invoice is standard practice. In addition, purchase orders over a certain amount require approval at a higher level of management. Even invoices above a certain amount may require multiple approvals.
Complicating the matter, the export of data HopNews received included payments to the same vendor company but spelled differently (“USBANK“, “US BANK“, “US BANK CORP”), in this case making it appear to be three individual companies. This makes reporting transactions by vendor challenging.
Introducing a vendor approval process and reducing the list of vendors would be a good first step in confirming that legitimate expenses are being paid. Additionally, requiring purchase orders to be issued by town departments before billing would ensure that only approved, budgeted expenses are paid.
Obviously, HopNews voided the check and will return it to Town Hall.
Prior to publishing, HopNews sent this article to Town Manager Khumalo and requested a comment. In a written statement, Mr. Khumalo said: “We learned today that the Town of Hopkinton recently received a fraudulent invoice from HopNews.com that was unfortunately processed and subsequently paid. We have taken the appropriate steps to correct for the mistake and cancel the payment; we have further taken the steps to ensure that our review processes for like payments are reinforced to protect our employees and the town from similar fraudulent activity in the future. We want to be clear that we have full confidence in our employees, and we will be pursuing appropriate legal recourse to protect the town in the future from fraudulent activities.”
The lack of basic financial controls creates serious doubt that invoices and payments are being scrutinized to an appropriate level of detail. We are left to wonder how often – and to what extent – the town has previously paid invoices for work it never received, or paid invoices that were over the budgeted amount, if there even was a budget. Unfortunately, it is a common occurrence in municipal fraud for vendors to issue inflated invoices that are unjustified. It is simply too tempting to grab a few extra dollars when no one is minding the store.