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Bell's auditors gave city clean bill of health despite record salaries, illegal taxes

http://latimesblogs.latimes.com/.a/6a00d8341c630a53ef013487d4200d970c-800wi

Year after year, while Bell's city leaders raised salaries, levied illegal taxes, slapped arbitrary fees on businesses and loaned public money to insiders, the city’s outside auditors, Mayer Hoffman McCann, gave Bell’s financial record a clean bill of health.

And Bell is far from being alone, according to a Times review of state and local records, which found that the independent audits that public agencies in California are legally required to obtain frequently fail to flag cases of fraud and mismanagement.

Many cities that have been troubled by public corruption or mismanagement during the last decade — including San Diego, Compton and South Gate — got clean audits, even in cases in which public officials were later sent to prison.

* There has been a widespread failure by auditors to make sure that cities are properly spending hundreds of millions of dollars in redevelopment money. Each year, approximately 100 of the state’s 391 municipal redevelopment agencies fail to file annual reports as required by law. Auditors are supposed to flag that failure as a major audit violation subject to review by the attorney general’s office, but auditors catch the problem in fewer than 20% of cases, according to a recent report from the state Senate Office of Oversight and Outcomes.

Firms that deliver negative audits risk being replaced. Cities pay the auditors, and some officials have responded to negative findings by hiring new auditors. In at least one case, the new auditors gave Victorville a clean rating after the previous auditor found a raft of problems.

“The audits of municipal governments in California … are more creative than reality” based, said former San Diego City Atty. Michael Aguirre. “They come in and help cover up what has been going on in a city so they can issue a clean financial statement, for which they are charging lots and lots of money.”

Concerns about the quality of municipal auditing have been raised over the years by legislators and others. But the scandal in Bell has brought new attention to the issue. Even as Mayer Hoffman McCann issued audits that did not flag problems in Bell, the city won numerous awards for the financial reports signed off by the auditor.

State Controller John Chiang’s office is investigating the quality of the Bell audits.

But officials said they have already seen enough to conclude there were major problems. Hallye Jordan, spokeswoman for Chiang, said state auditors were baffled by “how a CPA firm could miss the abuses the controller’s office found, and found rather quickly.”

Mayer Hoffman McCann declined to comment on the Bell audits. The firm released a statement saying it was cooperating with the controller’s office in its review of Bell’s finances.

Among the most glaring problems in Bell, Chiang wrote in a September report, was the lack of internal controls, something auditors are usually supposed to check.

“We found the city of Bell’s administrative and internal accounting control system to be, in effect, nonexistent, as all financial activities and transactions revolved around one individual — the former chief administrative officer — who apparently had complete control,” Chiang’s report said, referring to former city administrator Robert Rizzo.

The Times, using documents obtained from the city, found excessive salaries for top officials, with Rizzo on track to earn more than $1.5 million in 2010. The Times also uncovered $1.9 million in illegal loans the city doled out to employees, a car dealer and a foundation without City Council approval, and special fees Bell demanded that some merchants pay to stay in business.

None of these issues was noted by auditors.

After The Times’ reports, the controller’s office in a matter of weeks determined that the city had overcharged residents and businesses more than $6 million in taxes and fees. Chiang’s investigators also found that officials had placed $23.5 million in bond funds in a non-interest-bearing checking account, costing the city about $1.7 million in potential interest.

Those problems and others could have been found by auditors, according to experts in the field.

“I audit 70 cities in the state. I know what these guys make,” said Gary Caporicci, a certified public accountant who gives seminars on government accounting. “If I saw somebody makes $800,000, you have to say, ‘Time out. What’s going on here?’ ... It’s so out of line to what other clients have. ... Where are they getting all the money?”

-- Jessica Garrison and Jeff Gottlieb

Photo: Activist outside of Bell City Hall. L.A. Times

 
Comments () | Archives (21)

The Auditors must be held accountable for their work. Criminal penalties as well as significant civil fines should be doled out for these types of violations.

It has long been a concern of mine that public agencies where I have lived, be they cities, school districts, water districts or the like, are audited by CPA firms I have never heard of. When I have investigated, I have found they are generally small firms. I am guessing that these small firms have far less malpractice insurance than the amount of harm they might cause by their negligence.

That said, the purpose of an audit is not to second guess the business decisions of the public agency, such as setting public employee salaries and judging whether contracts with the public agency are over priced. I would be very surprised if anyone found an auditor-of-public-agencies who thought it was his/her firm's job to test tax and fee collections to see if they are lawful, let alone whether a redevelopment agency is misspending its money in comparison with the state's redevelopment laws. Those kinds of investigations are in the nature of forensic audits or specially directed audits, which CPAs for public agencies who prepare annual audits simply do not do.

Obviously, a legislative solution is required: (1) Having a state agency pick each local public agency's auditor, and then rotating the identity of the auditor periodically, (2) adding forensic audit or special audit criteria to what public agency auditors are required to investigate and (3) requiring that auditors for public agencies carry far more than $1 Million in liability insurance.

Realistically, until the Legislature enacts a specific law stating that local elected officials and local agency employees are fiduciaries for the public agencies they lead, there will be no realistic means of requiring local government officials to make good economic decisions free from the taint of self interest and influence peddling.

I have been involved with local government (city and county) in California for years and cannot think of a single instance in which an "independent auditor" ever reported an irregularity. In fact every irregularity that I know of that was uncovered was done by the media! I, and many of my colleagues long ago concluded that both inside and ouside auditing of state and local government in California is primarily a jobs program, not an auditing program.

If it were not for the reporters at the LA Times, we would still not know about Bell.

Bottom line, cities are supposed to be honest and treat their citizens with respect and integrity. Many in our country are only concerned with 'self'. That's hard to regulate.

There goes Mayer Hoffman McCann's credibility.

The current City government should sue the auditing firm for not red flagging the gross violations and irregularities.

And Moody's sells every single AAA rating, what is the point?

Why don't L A Times investigate whether any of these audit firms have been sued? And who would be responsible for suing them or failing to sue them? What were the names of the auditors for San Diego, Compton, South Gate and Victorville? A recent report from the state Senate Office of Oversight and Outcomes found audit failures - so which government agencies are supposed to take actions against the audit firms and cities? Has any action taken? We need more in-depth investigative reporting.

The salaries of many Los Angeles City and California State employees are bloated, and the city has levied many likely illegal taxes and slapped arbitrary fees on individuals and businesses. Whether it has loaned public money to insiders I cannot say. But much of what is described here is standard operating procedure for Democratic-controlled cites all over California, as well as the State itself.


“They come in and help cover up what has been going on in a city so they can issue a clean financial statement, for which they are charging lots and lots of money.” Mike Aguirre has no idea what he is talking about, just like when he was City Attorney. He will say anything for some face time.

Audit the auditors.

It is simple. The CPA firms are paid to look the other way. People at the companies know there is wrong doing but their jobs and pay checks depend on them saying everything is OK. Similar to what Arthur Anderson did with Enron.

INCESTUOUS LOT, don't you think?

Far too many audits contain language like the following "the financial information presented is from Management, we make no representations as to its' accuracy."


Check it out in your Annual Reports if you don't believe me.


I wonder what social function these auditors are serving if investors cannot rely on their reports to be accurate.

The simple answer is the outside auditors are CROOKS!

Nothing will happen to them or their business except for getting more work from other crooked business & cities like San Bernardino & Riverside!

The people don't have a chance when the crooks work together and support each other!

I would like the state Los Angeles, and the county to see who has been getting the money. We have more taxes, and fees with less service. The city is DRITY, no wonder the Pint Size Mayor is always out of town.

auditors=criminals

Bravo LA Times!! Yet as a tax payer, one can only wonder to what degree other municiplaties are guilty...

The state and federal governments must look themselves in the mirror as well; it is a safe bet that they have problems...only on a much larger scale.

Given the Wall Street/Washington greed fest, is it any wonder Bell is so corrupt?

An audit firm isn’t hired to identify fraud or any of the issues identified by the paper (maybe except for re-computing the tax base). A CPA firm is hired to provide an independent opinion on the city prepared financial statements so that they are relevant, accurate, complete, and fairly presented. The items in question are simply immaterial compared to the overall dollar amount of the financial statements.

CPA's are not supposed to determine management salary, or provide financial advice on where bond fund dollars should be invested. The city is responsible for making business decisions, just as any business makes the decision how much compensation each employee receives, or what to do with excess cash. This article makes it sound like auditors should be the final decision maker on city matters.

The types of items that the newspaper claims the auditors missed aren’t allowed on a CPA report.

I don't know where to start


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L.A. Now is the Los Angeles Times’ breaking news section for Southern California. It is produced by more than 80 reporters and editors in The Times’ Metro section, reporting from the paper’s downtown Los Angeles headquarters as well as bureaus in Costa Mesa, Long Beach, San Diego, San Francisco, Sacramento, Riverside, Ventura and West Los Angeles.
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