Although Denver is perceived as a national leader in its regulation of medical marijuana, an audit released Thursday found serious problems with how the city licenses, tracks and manages the booming medical marijuana industry in the city.

Denver has the most medical marijuana dispensaries in the state, but the city’s oversight has been “ineffective” and “inefficient” and poses “substantive risks to the city,” according to the report that Denver auditor Dennis Gallagher called “devastating.”

Lack of oversight potentially cost the city millions in lost tax revenues and put neighborhoods and citizens at risk, said one member of the audit committee.

City officials didn’t even know how many medical marijuana establishments operated in Denver and could not provide a map of their locations, according to the report that offered 20 recommendations for the city’s Department of Excise and Licenses to improve the system.

The report cited incomplete, inaccurate or inaccessible records; lack of formal processes or policies for licensing; poor coordination between the city and the state Department of Revenue; unenforced deadlines for key steps in the licensing process; and poor management and staffing.

“Do you have any assurance of the safety of our children and our neighborhoods?” audit committee member Jeffrey Hart asked Denver Excise and Licenses director Tom Downey in a meeting Thursday morning.

“We have phenomenal police officers,” Downey said. ” I can swear on their behalf that they are doing everything to protect the citizens.”

Hart responded: “I was asking about your department.”

“Yes, we are doing everything we could do to ensure that,” Downey said. “We need to do more. We have done everything we can with limited resources and are asking for more resources.”

Downey said his department was reeling, as was the rest of the city, from budget cuts because of revenue shortfalls and increasing expenses. Between 2008 and 2012 the city cut hundreds of millions of dollars from its general fund before voters in November allowed the city to retain excess property tax revenue.

Late last year, the city created a Career Service Authority position for the department and hired Larry Stevenson, who was the best man at Hancock’s wedding. Stevenson was hired through the normal process and chosen out of a pool of candidates. Stevenson is charged with implementing many of the changes suggested by the auditor’s office.

Hancock in a statement called the audit an “insightful review.”

“As a regulatory framework for medical marijuana was unprecedented at the time of initiation, we are learning lessons and turning them into opportunities to create a better, more efficient system moving forward,” he said.

He said in the coming months the city will:fix a loophole in state regulations so that dispensaries operating in Denver must have a Denver license; streamline processes;

and seek sufficient funding through fees and a proposed sales tax to ensure adequate staffing and technology.

Downey said he takes the blame for the faults and that he has addressed 15 of the 20 recommendations with the implementation of four in the works. Another was made moot because of a change in state law.

Auditor Gallagher pointed out the city generated as much as $4.6 million in 2012 from taxes on the sale of medical marijuana and asked why that money didn’t go back into regulating the system.

“Despite the fact that the department has been aware of many of the problems with the medical marijuana program for at least three years, management has taken few or no steps to address them due to certain limiting factors, departmental constraints, staffing issue and … specific department strategic issues,” the report says.

Denver Councilman Charlie Brown, who heads the committee devising the rules for the city’s retail marijuana system, said the report is disappointing.

“The money was there and it was what we needed to put the money where our problems were, and we didn’t do that,” he said. “We can’t let that happen again as we are getting ready for phase two.”

The city’s audit comes four months after a scathing audit of the Colorado Department of Revenue’s regulation of medical marijuana on the state level and an audit of the state health department’s patient registry.

SMART Colorado, a group opposed to increasing marijuana availability in the state, said in a statement the audit’s findings are why the council should put a moratorium on retail marijuana.

“Unlike the state, which is bound by Amendment 64 to proceed at a feverish, unrealistic pace to allow retail marijuana to become operational, cities and counties have been granted the option to say SLOW DOWN!”

Michael Elliott, director of the Medical Marijuana Industry Group, said Denver has done the best it could with limited resources.

“We think the recommendations in the audit are valid and a good path forward,” Elliott said.

Jeremy P. Meyer: 303-954-1367, jpmeyer@denverpost.com or twitter.com/jpmeyerdpost

Findings of medical-marijuana operations audit

City records and data incomplete, inaccurate and at times inaccessible.

Department lacks formal policies, procedures to govern the process.

Coordination between city and state for dual licensure has been poor.

Deadlines either not established or not enforced in the process.

Process lacks management oversight and adequate staffings.

Fee was established arbitrarily.

Key information has not been kept up to date as policies evolve.