Reports by the Washington State Auditor’s Office puts blame for financial problems at Island Transit squarely at the feet of its five-member board of directors.

But the real bombshell concerns Martha Rose, the former director, who took vacation without deducting it from her vacation balance. She will receive $106,000 in a severance package, including $88,000 in unused vacation.

Oak Harbor Mayor Scott Dudley, who’s back on the board, said the vacation payout amounts to theft and he’s seeking an injunction to prevent Rose from being paid.

A team from the state Auditor’s Office announced three official findings in the exit conference Friday morning largely attributable to lack to oversight. No misappropriation of public funds were identified, they emphasized.

Cause of the current financial crisis, which led to service cuts and layoff, was poor monitoring of finances by the the board, one report states.

The audits identified $100,000 in questionable costs associated with a federal grant — including the construction of gazebos — which could have financial consequences.

“Noncompliance with the grant requirements may require the transit authority to return all or a portion of this money to the grantor,” audit supervisor Jenny Lofton said.

The accountability audit largely focused on Rose. She received regular raises without board approval; her performance wasn’t reviewed since 1996; she took vacation without deducting it; and she claimed to go on two-week conferences when flight records show she was only gone for four or five days, according to a draft audit report.

The board approved a severance agreement with Rose following an executive session Oct. 17. She will get two months’ salary — about $18,0000 — plus $88,000 for unused vacation, per her contract, said Bob Clay, chairman of the transit board and Coupeville councilman.

Clay said problems concerning Rose were the result of poor record keeping, but nothing nefarious.

“I don’t believe Martha stole time or anything else that didn’t belong to her,” he said, adding she had much more leave on the books than would have been allowed to be paid to her under the separation agreement.

The auditors conducted three types of audits covering the year 2013: Financial reporting, federal and accountability.

The audit found no deficiencies in financial reporting.

Auditors identified significant deficiencies and material weaknesses with the use of the $17.9-million federal State of Good Repair grant, which was used for the new transit facility and required a $4.8-million match.

The report states that Island Transit did not have adequate control to ensure that grant money was only being used for allowable purposes. The money was inappropriately spent on maintenance items, such as a tractor and tires, and two gazebos.

The questionable costs totaled $70,000, plus there was $37,000 in “likely questioned costs” for similar items purchased in 2013 and 2014.

The federal audit found the agency inappropriately substituted in-kind activities for the matching cash and claimed $13,000 in payroll expenses above what was actually paid.

The auditors noted failures in record keeping, though the problems were resolved by the end of the audit.

The other finding in the federal audit is the agency’s financial conditions, which “has impacted current service levels and puts it at risk of not being able to meet financial obligations.”

The report notes that the agency was deficit spending since 2011, cutting the reserve funds drastically.

Clay asked the auditors why they didn’t warn the board about financial problems previously; he pointed out that the agency pays the auditors a lot of money to review the books.

Sadie Armijo, the deputy director of the Auditor’s Office, explained that the spending of reserve dollars was planned to occur as part of the construction of the new facility, so there was no reason to worry when the reserves were spent. She said there were still plenty of reserves at the time of the last audit, but the crisis came about quickly.

“In this case, the red flags went up really fast,” she said.

Langley Councilman Jim Sundberg, a member of the board, explained that spending on services exceeded revenues, especially after the state cuts in transit funding.

“We didn’t realize at the time we were providing more services than we could afford,” he said.

The board was receiving financial statements during that co-mingled capital money with operating funds ­— thus hiding the deficit — the auditors said.

The report faults the board and former director for not effectively monitoring the financial activity of the agency.

Audit Manager Andy Asbjornsen said it is ultimately the board’s responsibility to ensure the agency is financially stable.

“The board could always request more reports and ask more questions,” he said.

In the accountability audit, the experts found that the board did not have adequate oversight of its payroll.

Specifically, the report states the board didn’t approve salary schedules, as required by the personnel policy.

The board hadn’t done annual reviews of the director’s performance, contract and salary since 1996, though that was required by her contract.

Rose received salary increases every two years “without specific board approvals,” the report states.

Rose was self-approving and self-reporting her leave to the agency’s payroll specialist, without any oversight.

Rose’s calendar shows she was at a conference for 16 days in April 2013, but flight records show she was only in the same city as the conference for four days.

Likewise, her calendar shows she was at a conference for 19 days in September 2013, but flight records show she was only in the same city as the conference for five days.

Her four weeks of vacation spanned July and August of 2013; she had three weeks of vacation in June and July of 2014. Only six days of leave were deducted from her leave balance from August 2012 until September 2014.

“This audit highlights the importance of elected and appointed local government leaders’ stewardship and oversight and their duty and obligation to those who depend on public services and the taxpayers who fund those services,” said Thomas Shapley, deputy director for communications for the Auditor’s Office.

“It also highlights the importance of regular audits and how quickly the financial position of a local government can change.”

Both auditors and board members — with the exception of Dudley — agreed that the board has already taken most of the steps necessary to address the litany of issues.

Rose is no longer with the agency, and the board is looking at comprehensive budget information.

“It appears that transit is doing all necessary steps to resolve this issue,” Asbjornsen said.

Last year’s audit finding, however, is only partially resolved. The agency was dinged for not adequately monitoring take-home cars and fuel cards. It is still working on controls to ensure actual mileage matches vehicle and fuel use.

Rose could not be reached for comment.