State Auditor Crit Luallen released today the 2006 Fiscal Year audit of Knott County Fiscal Court. The audit details 23 findings and questions expenditures totaling $13,440,532. The audit has been referred to the United States Attorney’s Office for the Eastern District of Kentucky, Federal Bureau of Investigation, Attorney General’s Office, Kentucky State Police, Kentucky Transportation Cabinet, Knott County Attorney, Internal Revenue Service, Kentucky Department of Revenue, Kentucky Retirement System, United States Department of Labor, Kentucky Department of Labor, and Governor’s Office for Local Development. As with the previous two annual audits of Knott County, auditors issued a disclaimed opinion, meaning auditors cannot give assurance on the accuracy of the County’s financial statements. The Auditor’s Office continues to cooperate with the FBI and US Attorney’s Office in their on-going investigation.

“Each year that our office has released an audit of Knott County the situation has only gotten worse. And that’s in spite of a recent change of leadership in the county. It’s simply unacceptable that we have this continuing level of mismanagement and possible corruption. It is my hope that this latest audit and the resulting federal investigation will result in something finally being done about this problem. We need to bring accountability to the operation of Knott County’s finances,” State Auditor Crit Luallen said.

The audit uncovered that Knott County Fiscal Court spent $2.7 million on a Youth Center and over $400,000 on an ATV Center while the properties were still owned by private entities, in violation of Section 171 of the Kentucky Constitution. The deed, transferring ownership of the ATV Center property to the County, did not have the signatures of all the grantor property owners and, therefore, may not have been legitimate.

The Youth Center Project entailed the County giving a private foundation $10.2 million without a formal written agreement between the parties and without the Fiscal Court having ownership of the property. The source of the money given to the Youth Center Foundation was $8.2 million in proceeds from a bond issue, to be paid off over the next 20 years, with an annual payment of over $630,000, from a nonrecurring revenue source. An additional $2 million in coal severance tax funds was also utilized.

Because of allegations that public funds were spent on private roads, auditors reviewed paving invoices subsequent to the fiscal year of the audit. Between September 26, 2006 and January 23, 2007, $780,814 of road expenditures did not contain enough detailed information for auditors to determine the validity of the expenditures. In addition, over $14,000 of county money was used to pave one private road. The audit notes a 583% increase in paving expenditures for the first seven months of fiscal year 2007 over the entire fiscal year 2006. The amount of paving contracts during the same seven-month period is nearly three times more than the previous three fiscal years combined. After the paving contracts were brought to the county’s attention during the audit exit conference, the Knott Fiscal Court adopted 552 new roads into the county road system.

The audit also revealed a number of related party transactions. Related party transactions are interactions between two parties, one of whom can exercise control or significant influence over the operating policies of the other. The County Judge / Executive is president of the Youth Center Foundation Board. A chart within the audit (page 31) displays the multiple related party transactions that occurred during the fiscal year.

The audit also found that the Knott County bridge foreman was paid $69,411 as a private, independent contractor while receiving $40,291 as a county employee performing the same duties. Also, the county continues to allow private use of county vehicles by top officials without reporting it as taxable income to those officials. Additionally, the audit found that five people stayed on the Fiscal Court’s health and dental insurance beyond the dates they were no longer employed by the county.

Furthermore, Knott County failed to follow-up on prior year audit findings. These include a failure to recoup over $100,000 overpaid to a pool contractor, and a failure to reimburse over $400,000 of restricted funds.

“The Knott County audit for fiscal year 2006 continues to show serious mismanagement which warranted referrals to federal and state law enforcement agencies. The citizens of Kentucky deserve government with integrity at every level,” Luallen said.

The audit was conducted as a joint effort of the Auditor’s Office of Financial Audits and the Certified Public Accounting Firm of Simon, Underwood, and Associates.

The full report can be found by logging on to http://www.auditor.ky.gov.